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Development Needs to be Quality-Oriented in "New Normal" of Slowing Growth
2014-12-16
It is pointed at a recent Politburo meeting that China needs to focus on the quality of its economic development and adapt to this new situation. We can use this as a guide to understand the change in economic growth and have reasonable expectations for economic growth and orient our development on quality.
The growth transition follows natural economic growth
China's economy has basically been stable this year, with a slight dip in growth but many people are still concerned about China's economic prospects even though they vary in their ways of regarding the issue, with some being quite pessimistic, and arguing that the growth rate in the third quarter slowed to 7.3 percent, a record low in recent years. These people's expectations are based on growth and they are quite worried about China's economic potential. However, they might reach a completely different conclusion if they were to take into account the fact that the country is going from one stage of development to another and changing the structure.
China has had rapid economic growth for more than three decades, while many economies, including post-war Japan, the Republic of Korea and Taiwan saw the growth rate slow to some degree after their per capita income reached 11,000 Geary-Khamis dollars. This is quite obviously a pattern of development and is because people in agriculture are working in non-agricultural sectors, the labor supply is stabilizing or falling, and the cost of labor, land and environment is rising markedly and demands for most industrial products have begun to fall. China has by now experienced most of those things and it is estimated that its per capita income is coming near or has reached the point where economic growth starts to slow. As a matter of fact, the growth rate already slowed several years ago in some of its more developed coastal regions as they reached. Now, its overall growth rate has started to slow, indicating a new stage of less rapid growth. Slower economic growth is in accordance with the law of development and our economy starting to slow when per capita income reaches 11,000 Geary-Khamis dollars indicates that China has used its industrialization potential to the fullest and has avoided the mid-income trap that caught many Latin American countries. In other words, China has made it economically and its government is following a natural pattern of economic development when it lowered its goals for economic growth over the past few years. But some are finding it hard to accept this truth and are hoping that economic growth can stage a comeback. They need to reconcile themselves to the fact that human beings cannot work against the development law, or they'll pay a heavy price.
And, in spite of a dip in its growth rate, China is still among fastest growing economies. And as it grows, the volume has gotten bigger even if the growth rate slows. Where a 1-percent growth in GDP meant around 100 billion yuan, in 2000, now it means 500 billion to 600 billion. So, China's annual increment is quite large, almost that of the total GDP of a moderately developed economy, and it is growing. China is one of the countries with the largest growth potential and has a role to play in boosting the global economy. So, the arguments that China's economy is doomed are untenable.
If China can go smooth from a stage of rapid growth to one of less rapid growth, then we can reach the goal of doubling the economic aggregate and per capita income and building a moderately prosperous society by 2020. In fact, China will move up the rankings in economic aggregate and join the ranks of high-income economies. This will put our socialist modernization drive at a higher, better level.
Emphasis on structural adjustment and quality
Now, a slower growth rate is an eye-catching thing in developmental changes, but a change in speed is quite superficial when what really matters is structural adjustment and greater quality.
Previous analyses of China's growth were fraught with worries or complaints about its dependence on investment, industry, and exports. But, things are changing, or to be more specific, consumption now accounts for a larger percentage than investment, while tertiary industry outweighs secondary, export growth rate has slowed from 20 percent to 10 or 5 percent, labor input is falling, and environmental constraints are growing. China's economy is taking on a new growth pattern powered by consumer spending, the service industry, domestic demand and improved productivity.
Meanwhile, economic growth is stable, with improvements in some areas, for example, even though structural problems are causing job losses, the situation is not so bad overall and workers are even in demand in some regions. Whereas a 1-percent growth in GDP created about 800,000 jobs 10 years ago, it creates 1.7 million today and the idea of company profits closely related to fast economic growth has begun to change, with profits different because of slower economic growth, but things have been getting better over the past two years. Government revenues vary by region but revenues overall are growing at a reasonable pace and disposable income is growing faster than the GDP, and public services and livelihoods are improving. There are financial risks in some regions and sectors but not overall or systematic problems. Environmental problems are getting serious and smog is disrupting people's lives but there has been some progress in energy saving, emissions reductions and green development.
A changing development stage shows a change in the driving forces and structure, which might expose some contradictions or risks. Many economies have gone wrong or got stuck in this situation as the problems or challenges piled up. So it is remarkable that China maintained stable economic growth, moved forward in structural adjustment and quality, and saved the overall situation. This has again demonstrated the unique advantage of our system.
We emphasize the importance of development but it is not all about growth, since it also implies an improved economy, structural adjustments, and a changed development model, which are more important than growth. Still, slower economic growth does not mean less effort or no effort at all. Quite the contrary, a greater effort is needed to adjust our economic structure and development model. If you want to adapt to slower growth, the important thing is to establish a different structure with different driving forces. So, those aspects deserve attention. Looking forward, the socialist market economy will not mature unless it has its growing pains.
Quality-oriented development
The idea of improving development quality was proposed years ago but has not really been implemented. One important reason for this is that some problems were ignored amid rapid economic growth. Now that growth has slowed, we should focus on the quality of development. Otherwise, it will be even slower. In this, we must make it clear that development needs to be quality-oriented in the new situation. This is in fact an outlook on development in the new situation. We stress scientific development so we need to follow the laws of development. As we enter a new stage of slowing growth, we need to focus on quality of development in our planning and in our practical work.
It is true that we still need a relatively rapid growth rate at this new stage, but overemphasis on speed is meaningless. We used to see speed as the sole goal of growth and this distorted the relation between speed and quality. In the new situation economic growth is more dependent on increased productivity and it will be hard to have relatively rapid growth if we don't improve the quality of development. If we don't focus on quality, we'll fail to see a decent growth rate. Only if we make quality a priority can we get a correct understanding of the relations among different things involved in economic growth and realize our sustainable development potential. We need to carefully consider practical indicators that reflect the quality of growth in the new stage, and, based on these indicators set reasonable goals of growth, with a growth rate that meets quality development demands, deemed the appropriate rate.
A growth rate that is either too high or too low will have a negative effect on quality-oriented development. If it's too high, it will aggravate some already serious financial risks and overcapacity in some areas, and, if it's too low, it will lead to lower corporate profits and government revenues and affect employment. Nonetheless, it is not all that easy to propose a growth rate that matches quality-oriented development. In some instances, stimuli would be essential if there were signs of a rapid fall in growth, but it has to be made clear that, in spite of the immediate results, a stimulus cannot solve long-term structural problems. And, in any case, stimulus policies during a development change are merely designed to prevent the economy from deviating too far from its track and not for pushing it back onto the high-speed growth track.
Priority must go to prevent financial risks in quality-oriented development because rapid economic growth only concealed such risks or postponed their emergence. As our economy enters a new stage, risks might appear in local financing, shadow banking, property development and industries with excessive production capacity. When we say that growth should fit quality-oriented development, we want to ensure that such risks are under control. Many economies suffered financial crises after a rather long period of rapid growth and it took them many years to bring the economy back to normal. So we must give priority to prevent financial risks. As long as major risks with wide influences do not emerge, our efforts will be worthwhile, even if we fall short on some short-term goals. And, if we succeed, we will provide valuable experience for modern economic development.
In the final analysis, quality-oriented development depends on increasing reforms comprehensively. Some say that China has rapid growth potential and that institutional barriers could be stifling that potential and that China could regain high-speed economic growth if it carried out the proper institutional reforms. In fact, the relationship between reforms and economic growth is a complicated one, for example, relaxing market controls could unleash growth potential, while a corruption reforms could curb extravagant expenditures, at least in a short term. But one thing that reforms in both fields have in common is improved efficiency. Easier market entry can attract money but more important, it can help improve investment efficiency. Similarly, funds saved from halting extravagant expenditures can be used to alleviate poverty improve livelihoods and promote social and economic progress. So, we can say for certain that, quality-oriented development should be an important indicator of effectiveness. And, it is only by promoting reforms in key fields and laying a sound foundation for quality-oriented development that can China see relatively rapid economic growth and open a new chapter in healthy, stable, sustainable development.
The author is Liu Shijin, vice-minister and research fellow at the Development Research Center of the State Council (DRC).
The article appeared on Page 7 of the Dec 9 issue of People's Daily.
