Seven Opportunities for China’s Economy Under the New Normal _ Qiushi Journal

Seven Opportunities for China’s Economy Under the New Normal

By: Chen YuluFrom:English Edition of Qiushi Journal July-September 2015|Vol.7,No.3,Issue No.24 | Updated: 2015-Aug-19 09:32
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China has now entered a “new normal” of economic development. Under this new normal, China’s economy is coming under increasing downward pressure owing to the combined effects of sluggish external demand, falling domestic demand, adjustments in the real estate sector, and profound changes in the economic structure. However, the new normal does not mean that China’s economy faces nothing but difficulties, challenges, and risks. On the contrary, under the new normal, the assessment that China is in the midst of an important period of strategic opportunity in which much can be accomplished has not changed. What has changed are the implications and conditions of this important period. Likewise, the fundamentals underscoring the long-term, positive-trend development in the economy have not changed. What has changed is the way the economy is structured and the way it grows. For this reason, we may say that the new normal is presenting China with a major opportunity to embrace a new kind of economy. There are seven major opportunities for the development of China’s economy under the new normal. They are as follows. 

1. Sweeping reforms and restructuring

The international financial crisis of 2008 not only exposed serious structural problems in the world economy; it also spelt the end for China’s traditional model of economic growth, which was deeply embedded in the global economy. China faces formidable obstacles in its efforts to make the country strong and prosperous, rejuvenate the nation, and bring happiness to the people, most notably in the form of high energy consumption and high pollution resulting from high investment, serious social and economic conflicts arising from income disparity, and a low capacity for innovation owing to excessive government regulation and control. Sweeping reforms and restructuring are the only choice that China has if it is to rebuild the foundations of its social and economic development. The emergence of a consensus on the need to push forward sweeping reforms and restructuring is the best gift that the new normal has given to China as it prepares for a new round of development. China faces an excellent opportunity for development amidst a wave of global restructuring.

A high-speed railway from Guiyang to Guangzhou passes through a stretch of countryside in the outskirts of Duyun City, Guizhou Province (Photograph taken on August 20, 2014). Traversing the three provinces (autonomous regions) of Guizhou, Guangxi, and Guangdong, the Guiyang-Guangzhou High-Speed Railway is an important passenger transit line linking the inland regions of China’s southwest to the Pearl River Delta Economic Zone in the southeast. The railway began service at the end of 2014, and now the trip from Guiyang in Guizhou Province to Guilin in Guangxi Zhuang Autonomous Region takes only 2 hours, while the trip from Guiyang to Guangzhou takes only 4. PHOTO BY XINHUA REPORTER LIU XU

2. Economies of scale

Standing firm as the world’s second largest economy, China has witnessed significant increases in its share of global markets and scale of consumption. As Chinese demand emerges as the most important determinant of global demand, the economies of scale associated with an economy of this size have begun to present themselves across the board. First, economies of scale and scope have fully emerged in the market. Increases in productivity have offset rising costs of production, allowing China to retain its share of the global market. Second, consumption in China has reached a new high. As consumption continues to grow at an annual rate of 13%, China has begun its transformation from the “world’s factory” to the “world’s market.” Third, the “world’s factory” and the “world’s market” have begun to integrate. The integration of domestic and foreign trade has helped to keep the Chinese economy steady whilst significantly boosting its capacity to withstand global economic fluctuations.

3. Multiple growth poles

By the end of 2014, various industrial indices revealed that China’s economy was moving into the post-industrial phase, in which the economic dividends of industrialization will progressively diminish. Despite this, however, it is important to note the depth and breadth of China’s economy. In other words, while the Yangtze River Delta, Pearl River Delta, and Beijing-Tianjin region have shifted away from industry and towards services, the fact remains that China’s western, central, and northeastern regions are still in the middle stage of industrialization, a phase characterized by highly rapid growth. This not only leaves plenty of room for the upgrading of industries in China’s eastern regions, but also presents major opportunities for the acceleration of growth in the country’s central and western regions. The relocation of industries across China’s different regions in cascade fashion will not only slow down the decline of the industrialization dividend, but will also help to lay out a more favorable spatial development through the establishment of multiple growth poles.

4. A second demographic dividend

With the arrival of the Lewis Turning Point and the approaching of an aging society, the traditional demographic dividend that China has enjoyed for years is now diminishing. We are now seeing a new situation in which university graduate employment is low while rural migrant workers are in short supply. The pressure of employing over 7 million college graduates each year has brought starting salaries closer to the average pay of rural migrant workers. This is something that holds the key to China’s transformation from a country with plentiful human resources to one with more educated human resources. It means that China has a large contingent of well-educated young people to act as a highly-competent yet inexpensive reserve force to underpin the country’s economic upgrading. With this, a new demographic dividend revolving around university graduates and other high-end personnel has begun to replace an old demographic dividend that revolved around rural migrant workers and other low-end labor.

5. A technological dividend

An innovation-driven model of economic growth is beginning to emerge in China. This assertion is supported by the following data. First, the number of patent applications in China has risen significantly. Patent applications reached 2.577 million in 2013, representing an annual increase of 15.9% and accounting for 32.1% of the global total. This has made China the top patent filer in the world. Second, R&D spending has broken an important threshold. In 2014, spending on R&D accounted for 2.09% of China’s GDP, representing an annual increase of 12.4%. This means that China’s R&D spending has entered a phase of rapid growth and medium intensity. Third, China’s technology markets have become much more dynamic. The value of transactions in China’s technology markets was as high as 746.9 billion yuan in 2013, up 16% over 2012. Fourth, exports of hi-tech products have grown by a large margin, reaching US$660.3 billion, or 30% of China’s total annual export volume. Fifth, the number of scientific and technological papers that China publishes overseas has grown. In 2013, the country published almost 300,000 scientific and technological papers abroad, signaling that China has become one of the world’s major producers of research papers. And sixth, China is home to the largest contingent of scientists and technicians in the world. As the above data shows, as long as China further reforms its system for managing science and technology and encourages all kinds of innovation and entrepreneurial activities, the dividends of technological innovation will surely materialize.

6. An upgraded Chinese economy 

Thanks to the combined effects of the market, technology, and human resources, China’s economic upgrading is gathering momentum across the board. On the one hand, as per capita GDP approaches US$8,000, China has witnessed a significant spike in consumption, with spending on food, clothing, housing, and transport – dominant areas of consumption over the past 30 years of industrialization – increasingly being succeeded by a post-industrial model of consumption centering on high-end finished products and services. On the other hand, as driven by demand, China’s industries have begun a major shift from manufacturing to services and from labor-intensive industries to knowledge- and technology-intensive ones. Thus, we are now seeing initial signs of an upgraded Chinese economy.

7.  Going global

The overall growth of China’s economic strength, coupled with shifts in the global economic landscape following the international financial crisis of 2008, has given China a sound opportunity to open its economy wider and go global. First, Chinese mergers and acquisitions overseas have grown rapidly at an average rate of over 30% per year, with China’s overseas direct investment (ODI) for 2014 exceeding US$100 billion. Second, the establishment of regional free trade zones has amplified the effect of China’s opening up region-wide. Third, China’s efforts for spatial development and opening up are being comprehensively aligned by means of the “One Belt and One Road Initiative.” Interconnectivity among the nations involved in the “One Belt and One Road Initiative” will help to create new dimensions for China’s cooperation with other countries. And fourth, the establishment of new international financial institutions such as the New Development Bank (NDB) operated by the BRICs states, the Asian Infrastructure Investment Bank (AIIB), and the Silk Road Fund will facilitate the liberalization of international finance. The extension of China’s reach has given it more space for resource allocations across borders and making returns on investment. This is certain to carry China’s development into a new phase.

In short, China has seven major opportunities for economic development under the new normal. To seize these opportunities, and turn strategic opportunities into real growth and development, China will need to address a wide range of problems and challenges presented by the new normal. More importantly, by comprehensively deepening reform, China will need to put in place a framework of institutions and systems that are tailored to a new round of economic development. 

Chen Yulu is President of Renmin University of China.

(Originally appeared in Guangming Daily, March 19, 2015)