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China’s Economic Transition: The “New Normal” is here to stay
January 22, 2015, 2:53 pm

China’s National Bureau of Statistics published statistics on Tuesday, which showed that the economy grew 7.4 per cent in 2014.

China, undoubtedly, is encountering its slowest economic growth since the financial crisis in 2008.

The latest data at first paints an “unoptimistic” picture of domestic development, but since the slowdown had been predicted well in advance it reveals a valuable opportunity for economic transition.

In 2014, China’s domestic consumption contributed about 48.5 per cent to the national economy, 7 per cent more than the contribution from investment.

The world’s second-largest economy reported economic growth of 7.4% in 2014, the slowest pace since 1990, weighed by a slumping property market and a slow recovery for global demand [Xinhua]

The world’s second-largest economy reported economic growth of 7.4% in 2014, the slowest pace since 1990, weighed by a slumping property market and a slow recovery for global demand [Xinhua]

The number of new jobs created in urban areas is expected to exceed 13 million, while the CPI (consumer price index – the change in price of a basket of goods and services measured against the cost of living) remains under 3.5 per cent.

In short, despite the slowdown of economic growth and its enthusiastic reporting in the Western media, China has maintained acceptable levels of employment and inflation.

Development under the New Normal

With that in mind, Chinese President Xi Jinping in 2014 began using the phrase “New Normal”, to describe a slower expansion.

Predictably, the term gained increasing popularity in China’s official communications.

As explained by President Xi, the Chinese new normal state has emerged with three focal points.

1) Speed: The economy has shifted gears from the previous high-speed pace of growth to a medium-to-high speed pace;

2) Structure: The economic structure is continuously being improved and upgraded.

3) Motivation: The economy is increasingly driven by innovation instead of blind input and investment.

Indeed, China’s export-led boom is waning but most experts will also agree that the slowdown brings enough space and time for the adjustment of the economic structure.

Make no mistake, a growth rate above 7 per cent is still the envy of many a world economy.

In China now, the driving force on investments and exports is gradually shifting towards domestic demand and innovation.

In the meantime, further development in China calls for more improvement in production technology, and labor quality.

Business models need to be upgraded and a new round of stringent reforms must be introduced.

Speaking at a plenary meeting of the Chinese Cabinet on January 19, Chinese Premier Li Keqiang indicated that Beijing is preparing new rounds of economic transition.

“The Q1 performance is crucial to the whole year’s results, and the government shall work on making a good start this year,” said Li.

The “New Normal” has, therefore, become a new method of thinking about the three directions of industries below.

New Engine for the Tertiary Industry

In the first three quarters of 2014, the GDP of the tertiary industry increased to 46.7 per cent, which is 2.5 per cent more than the secondary industry. Specifically, the medical industry and pension industry show a strong growth momentum.

According to data from the Ministry of Human Resources and Social Security, each one percent increment of the tertiary industry contributes to 0.7 million job opportunities, with 0.61 million for the secondary industry.

The tertiary industry, thus, held a key card in balancing economic growth and employment in 2014. The urbanization rate of China is expected to be 52 per cent by 2020, which also could provide an opportunity for a blowout of the tertiary industry.

New Outbreak for the Innovative Emerging Industry

After 30 years of unprecedented economic expansion during which nearly 500 million people were raised out of poverty, China’s growth model is beginning to show signs of stress.

As a result, innovation has to be the most important driving force for China in 2015 and the coming years.

In the first three quarters of 2014, the hi-tech and equipment manufacturing industries grew by 12.3 per cent and 11.1 per cent respectively, notably higher than the average industrial growth rate.

Stimulation of innovative emerging industries has come from top-level policies. In 2014, China’s economic policy factory known as the NDRC (National Development and Reform Commission) enacted emerging industry pilot projects, and the Ministry of Finance promoted a series of financial support initiatives.

One of the key tests in China’s transformation will be the ability of Chinese firms to innovate rather than imitate or play catch-up with their foreign competitors.

In 2014, the government said it has focused on 7 strategic emerging industries – energy-saving and environment-friendly development, advanced information, biotechnology, new energy, new energy vehicles, hi-tech equipment manufacturing, and new material industry.

Those industries, with high growth rates and innovative potential, should provide ever stronger impetus for economic growth provided Chinese entrepreneurs seriously invest in research and development.

New Moment for the Green Industry

China’s pollution-intensive manufacturing industries have also come under increasing government scrutiny, with authorities more inclined than in the past to hand out fines to businesses that excessively pollute.

Because of the GDP-based criteria, natural resources are, sometimes, overused.

The strategic objectives of President Xi’s “New normal” fit in well here with the goal of “building resource-saving and an environment-friendly society”.

As the three decades of almost uninterrupted double-digit growth came at a high price of environment pollution and exhaustive exploitation of natural resources, the government is now focused more on sustainable development of the green industry: the changing of production modes and the changing of consumption patterns.

What the future holds

 In 2014, the Chinese industrial structure saw deepening changes: the tertiary industry, the innovative emerging industry, and the green industry was in sharp focus. As for the regional economy, the coordination of the east, middle and west areas are becoming much more harmonious. All of those changes unveil a new developmental logic for China.

The grand Chinese idea in 2014 was to steer China from a reliance on investment to a more balanced growth model driven more by consumption, services and innovation rather than exports.

The “new normal” and innovated economic development takes center-stage in 2015- and no matter what skeptics say China will continue to lead the global economy from the front.

 

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

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