Comrade Xi Jinping gave a systematic explanation of China's economic growth entering into a new normal in an important speech at the recently concluded Central Economic Work Conference. The speech was of great practical significance to unifying the Party's perception and implementing future tasks. From Xi's speech and the conference's spirit, the following conclusions can be made.

The new normal marks China's economic growth entering a higher stage

The new normal implies that the Chinese economy has finished the stage of rapid growth and has entered into a stage of medium growth. It follows the general pattern of economic growth in late movers and is the necessary result of changes in late-mover advantages as well as in the mode of technological progress. In essence, the new normal is a new change and new feature of an economy when it enters into a stage of new, higher-level development.

The late-mover advantage is the fundamental cause of long-term, rapid economic growth in countries catching up with developed ones. As the advantage varies, it causes changes in the speed of economic growth, economic drivers and the mode of economic development. Based on actual experience in China and other countries, the process of catching up can be divided into four stages.

First, the take-off stage. Due to institutional reform or external factors, late-moving countries get rid of low-level economic balance and start to see rapid economic growth. It is usually a short period of time, although it may take more time in some countries.

Second, the stage of rapid growth. This stage features huge investment; rapid growth; and rapid upgrading of industrial structure, resident consumption pattern, urban and rural structure, and export structure. During this stage, there is a huge market demand and a sufficient labor supply. Thanks to equipment purchase and technology transfer, it is easy for companies to organize and expand production. During this process, the demand for infrastructure and fixed assets investment surges. A great deal of surplus or idle resources is effectively utilized or transferred from the agricultural sector to non-agricultural sectors, and the productivity and per capita capital stock grow rapidly. China has been in this stage in the past three decades since reform and opening-up.

Third, the stage of medium-high growth. Late-movers are narrowing their gap with developed countries in terms of technological level, but they find it more difficult and expensive to introduce advanced equipment and technology. In addition, there is a slowdown in demand growth for infrastructure, consumption and export. Supplies of factors of production are short; prices soar; and the mode of simple, extensive growth in the early stage will no longer work. The rise in productivity relies increasingly on imitation, innovation and competition.

Fourth, the stage of medium-low growth. Most of the late-mover advantages no longer work as late-moving countries are getting even closer to developed ones in terms of per capita GDP. As traditional markets are becoming saturated and prices of factors of production soar, companies find it difficult to get rid of cost-related pressure through simple technology transfer and imitation. As a result, they start trying cutting-edge innovation in the hope of obtaining high profits by creating brand-new products, technologies and new business models.

The four stages develop one after another. The first two stages are more quantity-reliant, while the rest are quality-reliant. Of course, not all less-developed countries can see their economy take off successfully, and not all of them can go through all four stages. Some of them may get stuck in obstacles such as the poverty trap or middle-income trap.

China has entered into the stage of medium-high growth after more than three decades of rapid growth. Yet it remains in a strategically important period when it can make great accomplishments. Meanwhile, China will stay in the primary stage of socialism for a long period of time to come. The late-mover advantage will remain a fundamental driver for China to maintain relatively rapid development. There remains a wide gap between China and developed countries considering the fact that China's per capita GDP is merely one-eighth the figure in the US. That means there is much room for the late-mover advantage to play its role.

Evident reasons include an adequate labor supply at a relatively low cost and a rising supply of well-educated workers. Supplies of material resources are short while capital, knowledge and management experience are improving. The supply chain is efficient and has great coverage. Though the market is becoming smaller, demand is growing for infrastructure, renewed investment in manufacturing, and household material and cultural consumption. The manufacturing industry has the potential to improve productivity through optimizing resources and the ability to improve its technological level through imitation and innovation. The country remains in the preliminary stage of culturing multinationals and going global to seek and integrate international resources to improve technology.

As China has the late-mover advantage, it can maintain medium economic growth. China's GDP grew 9.8 percent on average year-on-year from 1978 to 2012. Putting aside the fact that GDP was scaled up during the third national economic census, GDP will grow by 7.8 percent year-on-year during the 12th Five-Year Plan (2011-2015) period if it grows by 7.4 percent this year and 7 percent next year. That is higher than the expected goal of 7 percent. If GDP grows by 6.5 percent year-on-year during the 13th Five-Year Plan (2016-2020) period, China can realize the goal of its GDP in 2020 doubling the figure set in 2010 by the 18th CPC National Congress report.

Meanwhile, as the economy enters into the new normal of slower but higher quality growth, it will bring about changes in the late-mover advantage, supply and demand, economic structure and driving forces. Specifically, capital will play a less important role in spurring economic growth than human resources and knowledge. Investment will lose ground to increased productivity. The country's comparative advantage of preliminary resources will shift to advanced resources like technology, capital and management. The government will interfere less in economic activities and instead improve the economic environment as a whole. Current and would-be economic changes indicate that China is shifting from the stage of rapid growth to the stage of medium growth, from a quantity-based stage to a quality-based one.

Risks and challenges in the new normal

China's economic growth in the past three decades fits in the general pattern of capital accumulation, technological progress and structural change seen in late-moving countries when they attempt to catch up with developed ones. Meanwhile, China's economic development has its distinctive features. For example, benefits from the country's reform are reinforcing its late-mover advantage. Local authorities are stepping up their efforts to catch up, which might also result in potential risks. Unbalanced development allows for different models of growth, and the super-sized economy has its own opportunities and risks. Such features would enable China to gain a faster growth rate than other late-movers, but at the same time result in more complicated problems when its economy enters into the new normal stage.

Fiscal and financial risks are gradually being exposed. Thanks to robust demand and rising prices, some risks in the mode of extensive growth are easily covered up and solved when the economy grows rapidly. However, they will gradually emerge now that the former risk-solving mechanisms no longer work and market players find it difficult to make timely adjustments when the economic growth slows and the structure is adjusted.

For example, manufacturing companies that used to make profits could lose money due to rising costs and insufficient demand. Bubbles in the property market might burst as demand contracts and local governments' land-based financial models no longer work. All these problems will emerge in the fiscal and financial sector. If well regulated, the risks will stay under control, be limited to a relatively small area and will be solved gradually. If not, the problems might cause systematic risks and affect the economy as a whole.

There emerges a gap between new and old driving forces. As economic growth has slowed in the past few years, there has been a lot of debate about whether China will fall into the middle-income trap. It should be noted that, different from countries in Latin America and Southeast Asia, China has maintained a relatively high level of industrialization and has kept its financial risks basically under control. In addition, it has rich exports and a huge domestic market. That means it is unlikely that the effort to catch up will be aborted. However, if China cannot come up with new driving forces timely, the growth potential could not be fully released and the economic performance is far beyond the latent growth level, it is possible that it will see an economic growth recession similar to what occurred in Japan in the 1980s and 1990s. New driving forces in the new normal of economic growth depend on innovation. The government should create an atmosphere that encourages innovation. More importantly, considering global resources, China will not realize modernization by following the steps of conventional capitalist countries. Instead, it must resort to innovation to explore a new road for industrialization. China has rich human resources, a solid basis of research and education, and great potential for innovation-driven development. However, drawbacks in its educational system, personnel system, filing for scientific programs and fund management have been strangling innovation. If such problems are not solved, new driving forces of economic growth will be difficult to establish.

It is getting more difficult to reach a balance on the macroeconomic level. Changes in the speed of economic growth, driving forces as well as the economic structure have made the macro-economy take on different features. It has also made it difficult to balance goals. If not well handled, it will affect the sustainability of economic growth.

First, it is getting more difficult to balance prices and growth. During the stage of rapid growth, exports have a great effect on boosting economic growth. But processing trade can offset some pressure resulting from rising costs. A surge in exports has little impact on the customer price index that ordinary people are more concerned about. Investment might cause short-term price hikes but it can be converted into productive capacity that can help cut prices. In the past decade, China's economy as a whole has seen a high growth rate and a low inflation rate. As it enters into the new normal of economic growth, it will depend more on consumption. When consumption grows rapidly, the economy picks up speed, but prices will go up too. Second, it is getting more difficult to balance pay rise and GDP growth. During the stage of rapid growth, labor flows from farms to factories, resulting in dramatically improved productivity and a rapid increase in laborer income. In the past 10 years, the increase in per capita rural resident income was a major driving force of the rise in income in both rural and urban areas. As the economy enters into the new normal, where the effect of structural adjustment weakens, the increase in rural resident income will slow. This is not favorable for income increase for all. On the other hand, a rising labor cost will affect corporate profits, its ability to invest and consequently economic growth. Third, it is getting more difficult to balance creating jobs and improving productivity. China overtook Japan as the world's largest robot purchaser in 2014. As it is replacing workers with robots, many workers in the manufacturing industry will have to seek new jobs. The real estate industry has maintained an average annual growth rate of more than 20 percent in the past decade. As its growth slows, many construction workers will be forced to look for new jobs. Different from the past, more jobs will emerge in the service industry, especially the manufacturing-related service industry. Such job transfer is more difficult than those jobs transferred within the same industry.

More factors that affect social stability will emerge. International experience shows that when a country reaches the middle-income level, its economic, political and social problems will become more complicated. That is because the primary problem in the preliminary stage of social development is to provide daily necessities, and the solution is economic growth. While the problem is solved, people will have demands for fairness, justice as well as other political aspirations. Long-lasting problems, that haven't drawn much attention in the past, include the income gap, corruption, deteriorating environment, food security and social credit, which might trigger social instability. If social stability cannot be maintained, the effort to catch up with developed countries will stop and economic growth will be affected.

To proactively adapt to the new normal and seize new opportunities

The new normal of slower growth is an essential stage of China's economic development. It won't be changed by human will. So understanding, adapting to and leading the new normal is crucial in the present and future.

Macroeconomic stability is an important prerequisite to handle various relations in the new normal. As the economy enters into a new normal, its development model, driving forces and risks are different from the past, so new ideas and methods are required. It is notable that the shift from extensive development to intensive development might not be as smooth as expected. Old driving forces might not be replaced with new ones in a timely manner, and social as well as economic risks might be exposed suddenly, which pose severe threats to macroeconomic stability. If there are strong macroeconomic fluctuations in a short period of time, various economic relations will grow tenser. If that happens, it would be impossible to create conditions for reform, but would likely trigger systematic risks or even cause great losses to achievements in past years. This is why the central government has emphasized seeking improvement in stability for the macro economy for the past three consecutive years. In the new normal, stability is a promise, and improvement is a solution.

The new normal will create new opportunities. Our economy entering into the new normal does not change the fact that China remains in a period full of strategic opportunities, though it brings about changes in the connotations and conditions of the period. It does not change the fact that the Chinese economy is positive; what it changes is the mode of economic development and economic structure. Structural adjustment means some companies might go bankrupt, and some people might lose their jobs. But it will improve the quality of assets and industrial structure and create new jobs and more value when it succeeds. Although the traditional market is saturated, a series of new technologies, industries and demands are mushrooming. Overseas demand for China's traditional exports has declined, but there is huge potential for its industries, brands, capital and human resources to go global in a new round of international division of labor thanks to its advantages in equipment, capital and supporting industries. Environmental protection and pollution control will increase costs, but areas like new energy will see new driving forces if China provides ecological products with a rapidly expanding demand and chooses a path of low-carbon and green development. It should be noted that the new normal is a necessary stage that China's economy must go through as it evolves into a stage that features a more advanced form, a more complicated labor division and a more reasonable structure. To enter into such a stage, reform in the economic mechanism should be basically finished. In addition, substantial progress must be made in structural adjustments, and the development mode and new driving forces under economic growth must have been established.

The fundamental way to adapt to the new normal is to deepen reform and opening-up in an unswerving manner. Reform and opening-up is the key to the economic development pattern shifting from size- and speed-oriented and extensive to quality, efficient and intensive development, and to the change of economic growth driving forces from traditional growth points to new ones. China should dare to wade through deep-water areas and accelerate reform of the economic system. It should focus on problems and come up with measures that are favorable for not only short-term development but also long-term institutional arrangements. China should show full respect to local regions, grassroots and the masses for their originality and seek the best solutions through practice. It should make sure that reform measures are well implemented, supervision is enhanced, and accountability and appraisal systems are introduced. It needs to let people comment on the fruits of reform. Facing new features of reform and opening-up, China should build an open economic system that proactively promotes the balance between domestic and international demand, between imports and exports, and between introduction of foreign capital and China's overseas investment. It should actively promote the Belt and Road initiative and help revise, promote and adjust the international economic order. China should further improve its investment environment, make it easier to enter the service industry, further open up the manufacturing industry, promote the experience of the Shanghai Free Trade Zone, stabilize the size and speed of foreign investment, and improve the quality of foreign capital. It should attempt to improve the efficiency of its overseas investment, help connect infrastructure, facilitate advanced industries to go global, conduct technological cooperation, promote the international use of renminbi, and push forward China's reform and opening-up to a higher level.

Increasing insurance and improving livelihood is a fundamental task as people matter the most. So China should put people's livelihood first in the new normal, in addition to defending the bottom line, improving the system and enhancing social governance. Employment is a fundamental part of livelihood. China should ensure generally stable employment against the backdrop of eased employment pressure and increasing structural contradictions. Meanwhile, China should bring into play the role of the market in stimulating employment, encourage job creation through entrepreneurship, improve the quality of occupational training and enhance the government's ability in serving employment. It should proactively promote the building of the social security system and social safety network in accordance with the general requirements of fairness, mobility and sustainability. It should pay more attention to safeguarding people's basic livelihood, especially the lives of low-income people, and social stability. China should boost regional economic development in consideration of local conditions and offer more support to basic public service and poverty relief. Its policies should be targeted at specific groups to get rid of poverty and should avoid mistaking the average income for the income of the majority poor, to ensure people of different ethnic groups in different regions all enter into a well-off society.

The author is Li Wei, President of the Development Research Center of the State Council (DRC).

The article was published in People's Daily on Dec 29, 2014 (page 7).