As China’s economy shifts gear, more value is being attached to quality when it comes to growth

By Deng Yaqing

Two months after the conclusion of China’s twice-a-decade national Party congress in October 2017, the country has again come under the global spotlight by convening its most important annual economic meeting, which from December 18 to 20 announced that the world’s second largest economy is entering a new phase of development, its focus moving from high-speed growth to high-quality development.

Attended by President Xi Jinping, also General Secretary of the Communist Party of China (CPC) Central Committee, the annual Central Economic Work Conference reviewed the nation’s economic performance over the past five years, outlined current economic realities and made plans for 2018, which marks the 40th anniversary of China’s reform and opening up policy.

By setting forth that the country’s economy will be characterized by more innovative manufacturing, a securer financial system, a more open and green economy, more affordable housing and improved standards of living for the people, the conference in fact mapped out a blueprint for China’s development over the next 30 years and beyond.

Development philosophy

During the past five years, Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era has taken shape, said a statement released after the conference. The thought is primarily based on the new development philosophy put forward by Xi in 2015 which features innovative, coordinated, green, open and shared development.

The statement described the thought as the theoretical crystallization of the past five years of practice in pushing forward China’s economic development, the latest fruit borne of a socialist political economy with Chinese characteristics, and the extremely precious spiritual wealth of the CPC and the country.

“Xi’s concepts provide solutions for the deep-seated, structural problems that China is facing and will face in the future over the course of economic and social development,” said Wu Qi, a senior research fellow with Pangoal Institution, a Chinese public policy research body.

More specifically, it provides answers on what to do, encompassing the continuation of supply-side structural reform and the pursuit of high-quality development, while clarifying how to do this, through measures such as deepening reform in economic institutions and administrative management systems, and expanding market access, said Wu.

A shift in focus

At present, as well as in the period to come, high-quality development is the fundamental requirement for determining China’s future economic path, defining policy and conducting macroeconomic regulation, said the statement.

“When a person grows from a child into an adult, the standards used to assess his or her personal development are adjusted to add indicators such as knowledge and work experience to the list including weight, height and health. In the same way, when a country reaches a certain development level, the mechanisms dominating its future growth should also be changed,” said Jia Jinjing, director of the macro research department at Chongyang Institute for Financial Studies of Renmin University of China, in an interview with Beijing Review.

At the micro level, it means that people will be put at ease over the quality of the products and services they can access, Xu Hongcai, Deputy Chief Economist of the China Center for International Economic Exchanges, told Beijing Review.

“People are no longer satisfied with just having the basics of food and clothing; they have higher requirements for the products and services they are exposed to in daily life. Given this, supply-side structural reform is inevitable,” said Xu.

Xu continued to say that inclusive growth and green development are the predominant features of the macro level. The gap between the rich and poor has been widening, and the campaign to reduce poverty and improve the living standards of the low-income population is still an uphill struggle. In addition, China used to favor a development strategy of “get rich first, clean up the environment later,” which doesn’t reflect people’s ever-growing needs for a better life in the new era.

The flipside of this shift in focus is that the traditional industries that used to sustain China’s economic miracle are slowing down, mired by overcapacity, and new growth generators must now be discovered and nurtured, Sun Jie, a research fellow with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, told Beijing Review.

Sun pointed to the extraordinary growth registered recently in e-commerce and advanced manufacturing, as well as the progress made in the decapacity and deleveraging of traditional industries like mining, iron and steel. “Once structural optimization is accomplished, long-term growth will be on the cards,” said Sun.

Jia echoes Sun’s perspective on the changing engines of China’s economy, and believes that new economic models and technological innovation will breed more growth. “For one thing, urbanization incubates new economic models such as mobile payment systems and the sharing economy, which has significantly contributed to the momentum of China’s growth in recent years. Additionally, technological innovation is becoming increasingly predominant in economic development, with its contribution to the economy standing at 56.2 percent in 2016 and expected to exceed 60 percent in 2020,” said Jia.

Challenges ahead

The conference also saw China’s central authorities outline the so-called “three tough battles,” three issues of critical importance that must be balanced while striving to achieve high-quality development, namely the defusing of major risks, targeted poverty alleviation and the tackling of pollution. As part of the first issue to guard against internal risks, China’s rapidly expanding financial industry is being placed under greater regulatory scrutiny as authorities step up efforts to curb widespread malfeasance in the sector.

“It’s difficult to prevent and control financial risks. On the one hand, compared with the real economy, the financial industry is immaterial and intangible, while forces of leverage endow it with amplifying effects. On the other hand, as the lifeblood of the economy, it has a bearing on almost every link and aspect of economic work, and the eruption of financial risks may affect the entire economic situation,” said Zhu Ning, Deputy Director of Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, in an interview with Beijing Review.

As to how to effectively control financial risks and curb related illegal activities, Zhu noted that a consciousness of risk should be nurtured in the market. “Chinese investors or companies tend to believe they don’t have to bear losses because the government will pay for the failure of a project, which has led them to add leverage or speculate,” said Zhu.

“Investors need to know they have to pay for taking risk, but the formation of such a consciousness will take a long time,” said Zhu.

The statement also said prudent monetary policy should be kept neutral, the floodgates of monetary supply should be controlled and credit and social financing should see reasonable growth.

“During the period of extensive economic expansion, simple expanded reproduction and market expansion were thirsty for money, and gushing investment into plants and equipment could drive growth. But China has bidden farewell to this way of working, and now what matters most to a country that is pursuing high-quality growth is technology and talent, rather than monetary supply,” said Sun.

As for the other two battles, Chinese policymakers have pledged to maintain the quality of poverty reduction efforts, and to focus on helping special groups in eradicating abject poverty. Efforts are also underway to significantly reduce pollutant emissions and to limit the environmental impact of further economic development.

Opening up

In its role as a pivotal and stabilizing force within the global economy, China will push forward a new pattern of comprehensive opening up, so as to pursue mutual benefits with the rest of the world, the statement said.

“Objectively speaking, China is the world’s largest manufacturer and consumer market. Given its extensive connections with the rest of the world, it should play a leading role in promoting global growth, which will in turn drive the country to intensify its opening-up strategy, initiating another age of globalization,” said Jia.

Since China has established itself as a frontrunner in some industries, it now needs to mold global value chains and nudge Chinese standards into the global market. To realize these goals, it’s imperative for the country to open wider to the outside world and admit more players into its market system, said Jia.

According to the statement, China will increase imports and cut import tariffs on some products to promote balanced trade, whilst free trade zone pilot areas will be expanded and effective guidance and support will be given to outbound direct investment. The country will also push for nationwide implementation of a pre-establishment national treatment system, as well as a negative list that determines where foreign participation is prohibited or limited.

“As a leader and promoter of globalization, China has stuck to an open attitude toward both foreign investors who seek opportunities here, and Chinese enterprises that hope to go abroad,” said Zhu.

“However, it is a long and continuous process. Over the course of the coming years, China must factor risk control and the demands of its partner nations into its own opening-up arrangements,” said Zhu.

Source: Beijing Review