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The ‘New Normal’ and The Future of China’s Economy

Jul 15 , 2015
  • Xu Shaoshi

    Chairman, National Development and Reform Commission

China’s gross domestic product grew 7 percent in the first quarter of this year. The growth slowed down by 0.3 percentage point compared with last quarter, or 0.4 percent year on year. That change is still within the normal range, suggesting that the economy is stable on the whole though the downward trend is not negligible.

Positive changes have taken place in April and May with some indices turning for the better and some others showing signs of improvement. The stability of the economy is demonstrated in four aspects. First, agricultural production and the development of the service industry are comparatively stable. Summer crops in major grain-producing provinces are growing well, suggesting a bumper harvest. The service industry saw a 7.9 percent growth in added value year on year, with the growth margin widening by 0.1 percentage point. Productive services, such as financing and IT applications, have been growing fast while services in tourism, culture and health developed in a steady way. Second, consumer demand increased steadily. In the first five months of this year, the total retail sales grew 10.4 percent. The growth rate in May was 10.1 percent, 0.1 percentage point age point higher than in April. Third, prices remained relatively stable on the whole. The CPI rose 1.3 percent year on year in the first five months, with the May figure being 1.2 percent, representing a moderate rise. Fourth, employment remained relatively stable. In the first five months, 5.81 million more people became employed in urban areas, making up 58.1 percent of the figure planned for this year.

However, the downward pressure is not negligible. First, foreign trade is far from reassuring. The total volume of imports and exports, counted in US dollars, plummeted 8 percent year on year, with the drop in May being 9.3 percent. Second, the growth of investment was weak. The fixed-asset investment grew 11.4 percent in the first five months, 5.8 percentage points lower than in the same period last year, or 0.6 percentage point shaved off from the figure in the first four months. Third, the industrial production saw a weak growth. In the first five months, the total added value produced by all large-scale enterprises grew 6.2 percent; the growth rate in May was 6.1 percent, a drop of 2.6 percentage points year on year. PPI in May dropped by 4.5 percent, representing a negative growth for the 39th consecutive month. Fourth, the central financial revenue saw weak growth. The revenue grew 3.1 percent in the first five months, a 5.7 percentage-point drop from last year. The growth in May was 3.4 percent.

Meanwhile, the recovery of the global economy remains slow. Major developed economies differ in their pace of recovery. Newly arising economies are generally slowing down in their growth. Global trade also shows a weakened momentum of growth, while prices of bulk commodities fluctuate at low levels.


The current development indicates that China’s economy is in a steady slow growth but is heading for better.

Since the second half of last year, the Chinese Government has adopted a series of policies and measures to stabilize the growth, promote reform, adjust the economic structure and benefit the public. In monetary policies, the central bank cut interest rates three times and lowered the deposit reserve ratio twice. In financial policies, the central government allocated 2 trillion yuan for local government loans replacement while cutting taxes to reduce enterprises’ burden. In investment, the government launched seven construction-project packages, six consumption-promoting projects and a number of major projects related with the “Belt and Road Initiative”, the Beijing-Tianjin-Hebei Coordinated Development, the Yangtze River Economic Belt and international cooperation in productive capacity development and equipment manufacturing.

Investigations indicated that all relevant parties were increasingly more confident about China’s economy and certain indices were returning to normal. First, both manufacturers and consumers have resumed their confidence. In May, the purchase manager index (PMI) of the manufacturing industry returned to 50.2% and remained above the critical point; the HSBC PMI was 49.2%, 0.3 percentage point higher than in April, and the index further climbed to 49.6% in June. Meanwhile, the consumer-confidence index rose to 109.9, up 2.3 percentage points from the previous month. Second, the industrial added value and certain industrial indices returned to normal. In May, added value generated by large-scale enterprises increased 6.1 percent year on year and 0.2 percentage point faster than the previous month. Industry-consumed electricity decreased by 0.6 percent but the drop was 0.5 percentage point lower than in April. The nation’s total volume of cargo shipments by railway rose 2.73 percent. Third, investment in manufacturing industry and real estate retuned to normal. In May, the investment in the two sectors increased 10.4 percent and 2,4 percent respectively, up 1.5 and 1.9 percentage points from April. Fourth, exports returned to normal. The exports dropped by 2.5 percent in May in a continued dwindling of the decrease. Fifth, the capital market remained active. The Shanghai Securities Composite Index reached a record high in seven years, giving a positive impetus to the macro economy.

As China’s economy entered the state of “new normal,” new problems also emerged. As early as in the middle of 2013, analysts noticed two phenomena. One was that disparity began to emerge between regions, industries and enterprises. For instance, regions which were earliest to restructure and upgrade their economies saw a stable growth while those which were slow in action suffered an obvious slowdown in growth. Industries also differed in terms of the speed of development. New industries, such as IT applications, biological medicine, high-end equipment manufacturing and new energies, obviously grew faster than the average level. The same was found in enterprises. Those that were active in changing their operation mode and invested more in innovation were apparently more capable of thwarting risks and advancing against adversities while those who failed to adapt to market changes found themselves mired in predicament. The other striking phenomenon was the inconsistency and weak correlation among statistics. For instance, the acceleration of GDP growth didn’t match that of the industrial consumption of electricity and railway cargo transport. A main reason was that high energy-consuming industries accounted for a smaller proportion in the entire industrial sector while shipment of bulk commodities decreased. Another example, employment kept increasing even though the GDP growth was slowing down. That’s because service industry was increasing as a proportion of the entire industry; the number of jobs created by each unit of GDP increased. There was also inconsistency between GDP and bank loans, between M2 and CPI, and between macro indices and enterprise efficiency. Changes are continuing, during which problems have been exposed but more important is the emergence of positive development, such as optimized structure and changing of growth engines. These new phenomena need to be studied for deeper insights about the trend of China’s economic development.

A look at the development trend indicates that there is no change in the upward evolution of the Chinese economy.

In the general trend, China’s economy has entered a “new normal,” which features three characteristics – speed change, structural optimization and engine shifting. There is no change in the trend that the Chinese economy keeps growing stronger and stronger. That should be attributed to the central government’s wise assessment of the situation and persistency in carrying out reform and innovation.

First, new thoughts and methods were adopted to exercise macro control, which guaranteed the steady and healthy development of the economy. Though faced with the downward pressure, the Chinese Government remained unaffected. It took certain measures of macro control to address the structural problems and other most prominent problems that had surfaced in the economy’s development. Exercised within the reasonable limits of economic operation, these macro control measures included specially targeted tax reduction, specially oriented deposit reserve ratio cut and pledged supplementary lending, which were combined with overall reduction of fees, tax and deposit reserve ratio to help enhance market demand, augment supply and improve growth quality.

Second, measures were taken to deepen the reform and encourage the public to start businesses and develop innovation. In the accelerated reform of administrative-approval procedure, 600 items were annulled or delegated to lower authorities. Items related to enterprise investment that previously needed to be approved by the central authorities were cut by 76 percent while 95 percent of items concerning foreign investment and 98 percent of items related with Chinese investment in overseas market no longer need to be delivered physically to the pertinent departments but instead can be registered online. The new “one license, one code” practice has been popularized to make it easy for companies to be registered. Last year, 1,293 new companies were registered with a total capital of 1.9 trillion yuan, nearly double the figures in the previous year. In the first five months of this year, 5.44 million companies were registered as startups, representing a rise of 15.4 percent. The anti-monopoly moves taken by the government improved the market order and created a healthy environment for fair competition. While continuing to encourage foreign investment, the government also took concrete measures to support Chinese companies to invest overseas. The “One Belt One Road” initiatives greatly promoted international cooperation in productivity enhancement for mutual benefit.

Third, efforts were made to change the development model, which in turn brought about structural changes. In 2013, the added value generated by the service industry accounted for 46.1 percent of the nation’s GDP, marking the first time the tertiary industry surpassed the secondary industry in GDP proportions. In 2014, the end consumption accounted for 51.2 percent of the GDP, exceeding investment in terms of contribution to economic growth. These two developments were the most striking changes in the economic structure in recent years.

Meanwhile, the industry restructuring continued. Development of strategically important new industries and high-tech industry accelerated. Internet-based new industries and new products are becoming new growth engines. Moves were also taken to speed up redistribution and upgrading of traditional industries. Positive results were achieved in dealing with overproduction. During the four years between 2011 and 2014, production capacities of 77.77 million tons of steel, 600 million tons of cement and 150 million crates of glass were scrapped.

Changes to the country’s regional structure made it more coordinated, with the development pattern of the East, Central, West and Northeast regions further optimized. With the launches of the “One Belt One Road” initiatives, the Beijing-Tianjin-Hebei Coordinated Development and the Yangtze River Economic Belt, a number of city clusters are becoming new growth engines.

The urban-rural structure is changing to become optimized. Moves were taken to promote a joint development of the primary, secondary and tertiary industries in China’s rural areas. Following the plan to help 100 million rural migrant workers to settle in cities, improve living conditions for 100 million urban residents in shantytowns and encourage 100 million rural residents in mid-western regions to become urbanized locally, China has been active in accelerating construction of new towns. The urbanization rate reached 54.8 percent in 2014. The expedited process of urbanization created ample space for China’s economic development. China is drafting the “13th Five Year Plan” to determine strategic goals for the country’s economic and social advancement in the next five years and an even longer time in the future.

In conclusion, China’s economy enjoys great potential and elasticity, which gives it enough leeway to cope with various changes and challenges, and its general trend of steady growth remains unchanged. We are confident and capable of keeping the economic development on the healthy track and realizing this year’s goals for economic and social advancement. China’s economy is an important part of the global economy. Its contribution to the global economic growth has reached 30 percent. A healthy development of the Chinese economy is a vital force to push the global economy towards recovery.

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