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The Cost of China’s Economic Transition

Oct 08 , 2014
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

China’s economy has entered “a new normality”. Although people have begun to accept this established fact in concept, it is not easy for them to accept it in mind and completely adapt to it.

The newly released year-on-year output growth of Chinese industries above a designated size in August went down unexpectedly, a new low growth rate since December of 2008. For the first time in the year, electricity production fell over the same period. However, the sliding figures do not mean “recession”, “hard landing” or even “collapse” of China’s economy. In the history of Chinese reform and opening-up, “China collapse theory” mainly occurred in 1989, 1997(the Asian financial crisis) and 2008 (the global financial tsunami). Nevertheless, in fact, China has been the fastest growing country in the world with its GDP increase by 155 times from 1978 to 2013. Fact will also prove that it may be a bit unnecessary for the outsiders to worry too much about China’s economic growth.

Indeed, starting from the first quarter of 2010, China’s economic growth rate has declined for 17 quarters, the longest period since China’s reform and opening-up. But, from the global perspective, “changing gear after a fast-paced growth” is an inexorable trend. The road taken by the world major economies, including the U.S., Japan, South Korea and other countries, all shows that any economy will need a period of adjustment after a fast-paced growth. Its growth rate will decline a bit, but it will fluctuate instead of straight decline.

In the past, the distinctive features of Chinese growth model were a “fast-paced growth” and an “imbalanced structure”; China’s growth momentum mainly came from “high investment” and “strong export”. In terms of power conversion, the old growth momentum withdraws in a volatile way and the new growth momentum comes in an imbalanced way, thus it is not strange to see an up-and-down economic growth in the next three or five years. In this new normality, China needs to accept the fluctuating economic data on the one hand and complete the structural upgrading and optimization on the other. It is shortsighted to expect the government to launch a stimulation policy to iron out the economic volatility, as this will not benefit China’s long-term economic growth.

The world needs to view the change of China’s economic growth rate from a new angle because China has entered a new development stage. There are two big development goals for this stage: the first one is to successfully stride over the middle-income trap and enter the development stage of upper middle income; the second one is to transform the mechanism of economic growth momentum and form an organic growth mechanism. In 2013, with its GDP per capita at more than USD6700, China already stepped into the stage of upper-middle income country. According to the international experience, the strategic task of this stage is to prevent the middle-income traps in the economic development, such as growth momentum “vacuum”, widening income gap, industrial upgrading difficulty, slow technological innovations and exacerbating social tensions, etc. The focus of China’s economic development in the future is how to find new growth momentum rather than reliance on some stimulation policy in the short term.

In fact, China can achieve a faster growth rate but has no intention to do so. Why? As President Xi has said, China’s economic growth must be a real, substantial, efficient, good quality and sustainable one. This means China should burst the bubbles that were blown up under the GDP mentality, and squeeze out the inflated growth. Since the 18th CPC National Congress, China has never stopped the work of “deleveraging” and “squeezing out the inflated growth” in its economy.

The first thing is to squeeze out the inflated investment. During the process of reducing the overcapacity, the new Chinese government has cut off the sources to the areas with overcapacity via reducing non-standard financing and window guidance in credit. In fact, it means squeezing out the inflated investment, shifting more resources to the areas beneficial to transformation and upgrading and to those livelihood service areas. The second thing is to squeeze out the inflated consumption. Since 2013, the anti-corruption tide has greatly curbed the government spending and consumption of luxury goods. The last thing is to squeeze out the inflated export. Since the release of Document No. 20 by China State Administration of Foreign Exchange, the authority has severely cracked down the inflow of arbitrage capital hidden behind the current account, heavily squeezing out the inflated trade. Chinese economic growth has returned back to a rational and normal status.

Not many people have noticed the correction of the imbalanced structure behind the slow growth rate. For example, in production area, the high-tech industry and equipment manufacturing industry is evidently better than that in the traditional manufacturing; in consumption area, there is an obvious increase in online shopping, e-commerce. E-commerce market transaction in 2013 reached USD9.9 trillion and is expected to arrive at more than USD20 trillion in 2017; in investment area, strategic emerging industries and modern service industry all show a good momentum. The investment in the high-tech industry and equipment manufacturing industry obviously grows faster than the average industrial investment. The ratio of the tertiary industry rose higher than that of the secondary industry for the first time in 2013. In the first half of this year, the ratio of the tertiary industry in GDP was 46.6%. The growth rate of the tertiary industry is constantly faster than that of other industries and its ratio in GDP continues to increase. Many eastern coastal areas in China have basically accomplished their industrialization and need to move into the post-industrialization stage to form an economic structure based on service economy. This new structural change is continuously and deeply influencing China’s economy and even the world economy.

At present, there are indeed many worrisome problems in China’s economy, but it could be a blessing in disguise. Maybe, the slower economic growth is the price that China has to pay for its economic transition as well as a beginning to move into a new growth model.

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