Prospects for the Chinese Economy

By+staff+reporter+JIAO+FENG

THE 2015 Government Work Report set Chinas economic growth target for the year at 7 percent， the lowest for the past 20 years， so marking the fourth consecutive year that the Chinese government has reduced its economic growth expectation. Although in accordance with the middle- to long-term development law of the Chinese economy， this modest target has nonetheless generated worry about mounting pressure from the economic downturn and the high risk of deflation – apparent in feeble investment growth， paucity of new consumption hotspots， and mediocre performance on the international market.

The Government Work Report also pointed out that China will still be at the primary stage of socialism for some time to come， and that development is of overriding importance as the foundation and key to solving all problems. We must make economic development our central task， rely on reforms to promote scientific development， and accelerate transformation of the economic development mode to realize high quality and efficient sustainable development.

Chinese Economy Enters New Normal

In 2014， China entered the so-called new economic normal characterized by relatively lower economic growth. Chinas focus is now on the quality rather than speed of economic growth.

What is the “new normal”？ According to well-known economist Li Yining， the new normal has three characteristics. One is a growth rate gradually gearing down from high speed to middle-tohigh speed. The second is a readjusted economic structure wherein many industries continuously upgrade. A new motivating force is the third.

Li Yining believes that Chinas economic growth needs to slow down due to the immense size of the countrys economic base. From the economic development perspective， the broader the base， the lower the growth rate； hence the latters diminution. The quality of Chinese economic growth at the early stage was poor， featuring excessive production capacity and a consequent glut of products. All of these factors caused the present downturn. In addition， the global economic situation as a whole is far from good， with great uncertainties that greatly affect exports of Chinese commodities. Even enterprises that have achieved market transformation will not see results in the short term. Moreover， although industrial adjustment has begun， it will not be plain sailing. Restructuring inevitably entails “l(fā)abor pains，”difficulties， and thorny adaptations. It hence requires patience and constant adjustments. Technical innovation can play a leading role in economic growth， but there is a considerable time gap between research and actual effect.endprint

Although Chinas slowing economic growth is a focus of public concern， most economists and enterprises remain optimistic. Yang Kaisheng， former president of the Industrial and Commercial Bank of China， holds that although Chinas economic growth was only 7.4 percent in 2014， due to its broad base the increment can nevertheless satisfy the needs of the newly-increased population and also has the capacity to improve its present life quality.

The year 2014 saw an additional 13 million new jobs， implying a change in the elastic coefficient between economic growth and employment. This is also the result of economic restructuring. In addition， although excessive production capacity is not easy to address， urbanization， industrialization， and informatization are not yet accomplished， public service standards are not high， and there is inadequate supply of public goods， new investment opportunities nevertheless exist.

“In February this year， the PMI was 49.9 percent， still below 50 percent （a reading of 50 or above indicates expansion， while a reading below that level indicates contraction）， but it was 0.1 percent higher than the January figure， so ending a decline over four consecutive months. More important， the index of new orders has risen to 50.4 percent. This implies a good momentum of economic operation，” Yang Kaisheng said.

Industry Plays the Leading Role

National Bureau of Statistics data show that Chinas industrial addedvalue in 2014 amounted to RMB 22.8 trillion； also that its exports of industrial products make up one-seventh of the global total. Both have a top worldwide ranking. China has indeed lived up to its reputation as a great manufacturing power. In 2013， the proportions of Chinas first， second and tertiary industries began to change， whereby the tertiary industry for the first time surpassed the second industry. Following readjustment of industrial structure， there is now strong consensus on the need to develop service industries， featuring low consumption， low emissions， and big capacity job creation. In 2014， the tertiary industry proportion was 48.2 percent， and that of the second industry 42.6 percent， so confirming a widened gap. “But industry still plays the leading role in Chinas economic development，” said Li Yizhong， deputy director of the Financial and Economic Committee of the Chinese Peoples Political Consultative Conference and former minister of Industry and Information Technology.endprint

According to Li Yizhong， the industry has provided the service industry with rich commodities and extensive service targets. The service industry in developed countries in the post-industrialization period makes up 70 percent of GDP， of which producer services make up 60 percent. The manufacturing industry can extend downstream by developing after-sales service， professional service， value-added service， and entire life-cycle service， and can also conduct electronic business. The manufacturing industry can extend upstream by providing research and development， design， consultation， information， and energy conservation and environmental protection services. Large and medium-sized backbone enterprises can push their internal services to the market through restructuring and reform， so forming a social service platform. Small and micro enterprises， meanwhile， can share the results of social reform through service outsourcing. Manufacturing servicization not only raises the additional value of industrial enterprises， thus helping the related enterprises achieve transformation and upgrading， but also expands producer services. It is an important way to develop the service industries.

“For example， do automobiles and domestic electric appliances belong to manufacturing or services？ They should combine manufacturing and services. Auto makers need 4S stores to provide services and maintenance， and the same is true of domestic electric appliances. They not only produce domestic electric appliances， but also provide door-todoor services， installations and repairs， and even conduct electronic business. Manufacturing servicization is an important orientation of industrial upgrading， and also one of the channels through which to develop service industries，” Li Yizhong said.

The work report at the 18th National Congress of the Communist Party of China states that China will be a moderately prosperous society in all aspects by 2020. Basically realizing industrialization is a main task towards this end. At present， China is in the middle to late period of industrialization and， taken as a whole， in the middle to lower end of the global value chain， Li Yizhong said. Eliminating outdated and excessive capacities and carrying out industrial transfers will readjust industrial structure and distribution without weakening the second industry. Developing the tertiary industry， moreover， does not imply the withdrawal of the second industry. In the historical period of realizing industrialization， the leading role of industry must be brought into full play.endprint

The Motivating Power of Economic Development

In the past， when China was known as“world factory，” the countrys economic development relied on labor-intensive processing industry and middle- and low-end manufacturing. Rising labor costs， however， lost these industries their comparative advantages. The de-velopment mode of expanding quantity and scale and relying on investment to propel economic growth， however， does not suit the new conditions， Li Yining said. In future， economic growth must rely on the peoples innovative spirit and entrepreneurial activities. The peoples creative power will， in effect， provide the motivating force.

As is generally known， the dynamic mechanism of a countrys economic growth lies in the steady rise of labor productivity and in continuous technical innovation and industrial upgrading. Innovation can push forward energy conservation and emission reduction， and optimize configuration of the means of production， Li Yizhong said. Through innovation， we can push forward the intelligentizing， digitization and networking of the manufacturing industry， and improve the efficiency of production tools. And through innovation， labor-intensive industries can realize mechanization and automation. “Machines replace human beings， and human beings control machines，” is hence the mode through which to improve labor productivity. In addition， innovation can also promote breakthroughs in the countrys major scientific and technological projects and industrial generic technologies.

Economist Justin Yifu Lin holds that technical innovation and industrial upgrading are late-mover advantages in the international cutting-edge technologies of developing countries. Their use can accelerate their growth to double or triple that of developed countries.

Chinas industrial restructuring has eliminated many enterprises that relied on low costs to develop. Innovative enterprises that generate profits through new patterns of consumption and commercialization， however， are growing rapidly. Consumption upgrading provides broad markets for enterprise innovation.

In his government work report Li Keqiang called for entrepreneurship and innovation by the broad masses of the people. China has a population of 1.3 billion and a labor force of 900 million. The country thus has infinite reserves of creative power which， when pooled， will form a huge source of kinetic development energy.endprint

SOE Reforms Inject Vitality into Economy

Last years launch of mixed ownership was the prelude to a new round of SOE （state-owned enterprise） reforms. In July 2014， the State-owned Assets Supervision and Administration Commission announced the first batch of six centrally administered SOEs that would become the pilots for the new round reform. They included China Oil and Foodstuffs Corporation and China National Pharmaceutical Corporation. Meanwhile， reforms have also been launched in the high-speed rail and nuclear power fields.

Gan Lianfang， president of Beijing Xingpai Group， holds that developing mixed ownership has revitalized the economy. He added that the Xingpai Group and China Life Insurance have made greater achievements in their first real estate venture than expected， and that they have begun their second round of cooperation in the health industry. They will eventually establish “China Life· Xingpai Health Management Investment Co.， Ltd.，” so making platformization， capitalization， internationalization， chain-orientation， and marketization their development orientation， through using their respective advantages.

“China Lifes advantages are its brand name， comprehensive strength， and reputation， while ours consist in our mechanism， system， and efficiency. Our cooperation thus brings these advantages into full play， minimizing our disadvantages. We have reached consensus on this point，” Gan Lianfang said. “For instance， China Life Insurances decision-making mechanism is slow， but I can use our flexible mechanism to offset it. Before the establishment of our joint venture， I pad-funded RMB 30 million to set up a healthcare experience center for seniors. By doing so， I made full use of our flexible decision-making mechanism advantage. So far， the market response is very good.”

Li Yining holds that implementation is the key to SOE reforms. Every enterprise should have its own approach， and methods cannot be duplicated. Various trades， including monopoly industries and competitive industries， are different， and enterprises are on different scales. It is impossible to use one mode for all enterprises.

Further Marketization of the RMB

On March 1， 2015， the Peoples Bank of China， Chinas central bank， decided to lower its deposit and loan interest rates 0.25 percentage points respectively. This is the second interest cut since November 2014. In addition， on February 4， 2015， the central bank lowered the reserve requirement ratio （RRR）. Thus， China has entered the cycle of interest and RRR cuts. Up to now， the RMB has shown persistent weakness against the US dollar， creating an almost twoyear low. This has triggered speculation that the RMB is joining the devaluation ranks.endprint

Yi Gang， vice governor of Chinas central bank and chief of the State Administration of Foreign Exchange， unequivocally refuted this rumor. “If we take look at the basket of currencies， the depreciation of the euro and Japanese yen both surpassed 10 percent， while the Renminbi only depreciated 2 percent. Both the real effective exchange rate and nominal effective exchange rate of the Renminbi are going strong. If we say that the US dollar is the strongest currency， then the Renminbi is the second strongest currency.”

Yi Gang holds that， fundamentally speaking， the Renminbi has undergone appreciation for a decade. Having remained basically stable， it has thus achieved equilibrium. At present， the prospects for Chinas economic growth are optimistic. Although the growth rate has changed from high speed to medium-to-high speed， GDP growth is still relatively fast compared with other world economies. In addition， the current account surplus in Chinas international balance of payment is substantial， and exports exceed imports. This is crucial to maintaining fundamental foreign exchange market stability.

Meanwhile， the Renminbis internationalization has accelerated. The world has a certain demand for Renminbi in trade， foreign investment and asset allocation. Asset management companies and asset managers of various countries are willing to hold RMB bonds， shares or RMB-denominated assets. Yi Gang holds， therefore， that in the long run， the Renminbi will be a stable currency， and that Renminbi movements are within the normal range. Two-way fluctuations， furthermore， will become normal.

As for Renminbi internationalization， Yi Gang sees this as a marketization process. When conditions are ripe， success will come. “If overseas enterprises， residents， financial institutions and financial markets need Renminbi， this is the proactive choice of main market players out of their own interests. It accords with market forces wherein resource allocation plays a decisive role in the laws of the market. Therefore， whether Renminbi internationalization is fast or slow is the choice of the market. The Renminbi is evermore market-orientated， and the Chinese government has no timetable for Renminbi internationalization.”endprint