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The New Normal Driven within a New Framework

Aug 14,2017

By Li Wei

Research Report Vol.19 No.4, 2017

China has undergone profound changes in the growth rate, structure and driving force of the economy ever since the beginning of the 21st century. In particular, since the 12th Five-Year Plan period began,the imbalance between supply and demand has become increasingly prominent, the industrial structure has been under adjustment,the engine of growth has changed, and the focus of economic growth has been shifted from quantity increase to quality and efficiency improvement. With a slow down in growth, the Chinese economy is arriving at a new stage marked by even greater challenges to development and to macro-regulation.

In such a context, the CPC Central Committee with Comrade Xi Jinping as the core has been introducing innovative approaches to macro-regulation based on an accurate understanding of the trends in global economic development and the changes in China’s economic development since the conclusion of the 18th CPC National Congress. On the basis of recognizing that China has entered a new normal in economic development, the central authorities have established a macroeconomic policy framework characterized by a new vision of development, the main strategy of supply-side structural reform, and the principle of pursuing progress while ensuring stability.

Into the second half of 2016, the Chinese economy began to witness some positive changes, and favorable factors in the international environment began to grow in number, which consolidated the foundation forsteady growth. In such a context, China’s economic transformation was expected to enter a new stage, with the focus gradually shifted from “slowing down” to “improving quality”. In the first half of 2017, this trend continued,and the growth rate of the economy reached 6.9%. Overall, within this framework, China is entering a stage of medium to high-speed growth and the downward trend is apparently losing momentum, after the adjustments over the past five years. Due to the adjustment of the real estate market, financial deleveraging, slow down ininvestment growth and reduced restocking effect, there might be a gentle decline in economic growth in the second half of 2017. Therefore, the Chinese economy in 2017 will be characterized by “high-speed growth in the first half year and steady growth in the second” and all the targets set at the beginning of the year are expected to bereached or even exceeded.

The new macroeconomic policy framework has the following four distinctive characteristics:

First, it is recognized that China has entered a new normalin economic development. The growth rate of the economy has fallen from a high level to amedium/high level while qualitative changes have occurred in economic development. Besides, the economic structure is also undergoing profound and comprehensive changes. The engine of growth has changed from resources and investment to innovation. Understanding and leading the new normal is a prerequisite for every economic endeavor at present and in the future.

Second, a new vision of development has been established as theoretical guidance. The vision of innovative, coordinated, green, open and inclusive development points the wayfor all endeavors to advance economic and social development. It marks a profound change in the philosophy of, approach to, and focus of development in the 13th Five-Year Plan period and beyond.

Third, supply-side structural reform is established as a main strategy. The ultimate goal of the reform is to satisfy demand, the focus is on improving the quality of supply, and the fundamental approach is to deepen the reform. This is crucial to solving outstanding problems and meeting all the challenges facing China’s development drive.

Fourth, the principle of pursuing progress while ensuring stability isadopted in governance and economic endeavors, which marks a major adjustment to the guidelines in this regard. It is stressed that strategic focus must be maintained and the rush for quick results should be avoided to put the economy on a track of steady and healthy growth.

This economic policy framework has proved to be effective in contributing to the progress China has made in macro-regulation.

First, China has achieved a smooth transition from high-speed to medium to high-speed growth. Since 2010, China’s economic growth has been slowing down year by year so the risk of rapid decline in a short period experienced by other economies in transition is prevented. Moreover, into the second half of 2016, the Chinese economy began to show signs of a steady and positive trend, and growth rate stayed at 6.9%in the first half of 2017.

Second, the economic structure is being improved. The contribution of consumption to economic growth rose from 54.9% in 2012 to 64.6% in 2016. The tertiary industry grows faster than the secondary industry and has become the biggest engine of economic growth, with its contribution to GDP growth growing from 44.9% in 2012 to 58.4% in 2016. Besides, China has gathered speed in developing new engines of growth. With industrial integration on deeper levels, new technologies, new industries and new operations have been growing rapidly, along with fast growth in high-tech and equipment manufacturing industries.

Third, the quality and efficiency of development are improving. Industrial profits have grown significantly over2014 and 2015 and the growth was up to 22.7%in the first five months of 2017. Employment levels have stabilized. Specifically, the registered urban unemployment rate fell to 3.97%in the first quarter, lower than 4%for the first time. Government revenue also increased rapidly in the first half of 2017. Public revenue increased by 9.8% year on year, much higher than those in 2014 and 2015.

Fourth, the vitality and momentum of innovation have been increasing. China’s R&D expenditure accounts for about 2.1% of its GDP, higher than the average level in OECD member countries. It takes decades or even longer time to increase the ratio of R&D expenditure to GDP from 1% to 2% in most countries, but China only needs 12 years. In addition,78% of the R&D investments are made by enterprises. In the latest Global Innovation Index rankings, China’s ranking has climbed from the 35th place in 2013 to the 22nd in 2017, and it is the only non-high-income economy among the top 25. It is fair to say that China has entered a period of active innovation.

The new framework places emphasis on six focuses of macro-regulation. In the next phase,macro-regulation efforts should be made within the framework to maintain steady economic growth and avoid any sharp fluctuations. More attention should be given to the following six aspects:

First, the relationship between macro-regulation and the deepening of reform. To avoid risks at source, the ultimate way is to deepen the reform, and to do that, the key is to give play to the decisive role of the market in resource allocation and ensure that the government plays its due role better so that market participants are more sensitive to macro-regulation signals and macro-regulation policies work properly.

Second, risk prevention. The process of transformation is bound to be full of risks. Therefore, a priority of macro-regulation should be to prevent risks, particularly systemic financial risks.

Third, market expectations. The communication with market participants should be boosted. Policy transparency should be increased so that market participants can better understand the purpose of policy makers and thus misunderstanding and widemarket fluctuations can be avoided.


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