What Is the New Normal in China's Economic Development?

What Is the New Normal in China's Economic Development?*

January 18, 2016

I have talked about the new normal in China's economic development many times, but today I will approach it from a historical and practical perspective.

A distinctive characteristic of economic development during the 13th Five-year Plan period (2016-2020) is that it has entered a new normal. Under this new normal, the economy is shifting from a high to a medium-high rate of growth, from a growth model that emphasized scale and rate to one that emphasizes quality and efficiency, from an economic structure in which economic growth was mainly fueled by the increment and increased industrial capacity to one in which the existing capacity is adjusted and the increment is put to best use, and from being driven by production factors such as resources and low-cost labor to being driven by innovation. Such changes are essential for China's economy to upgrade to a more advanced level, with better division of labor and a more rational structure. Realizing these extensive and profound changes is no easy job; it presents us with a new and significant challenge.

According to an ancient Chinese official, "A smart man changes his approach as circumstances change; a wise person alters his means as times evolve." To plan and promote our economic and social development during the 13th Five-year Plan period, we must accept understanding, adapting to, and steering the new normal as an essential logic in the overall situation and the entire process.

Historically, new situations, patterns and phases have constantly emerged in China's economic development, and the new normal is just one more stage in a long historical process. This is in complete conformity with the development law of upward spiral. To comprehensively understand and grasp the new normal requires us to review China's development from the perspectives of both time and space.

In terms of time, China has gone through several major stages in its development – from wax to wane and then to wax again. Today's new normal is a result of one such stage transition.

Ancient China thrived on agriculture and led the world in farming for a long time. It had a population of more than 60 million in the Han Dynasty (206 BC-AD 220), and an area of cultivated land of over 53 million hectares. The capital city of Chang'an in the Tang Dynasty (618-907) covered an area of more than 80 square kilometers, with a population of over 1 million. It had magnificent palaces, temples and towering pagodas, as well as the prosperous east and west markets. A poem by Tang poet Cen Shen (c. 715-770) wrote: "There are one million households in Chang'an City." In the Northern Song Dynasty (960-1127), the maximum national tax revenue reached 160 million strings of coins [one string contained 1,000 coins], making China the richest country in the world at the time. None of the cities of London, Paris, Venice or Florence had a population of 100,000, but China hosted nearly 50 cities each with a population of 100,000.

Unfortunately we fell behind after the Industrial Revolution in the late 18th and early 19th centuries, when Western countries began to rise. After the Opium War (1840-1842), China's self-sufficient economy began to disintegrate, and the country failed to seize the opportunity of the Industrial Revolution. Although progress was made in our industry, and some foreign capital entered China – for instance the concessions in Shanghai, Tianjin's industry, and Wuhan's military industry – China was as a whole an impoverished, backward and war-torn country, falling way behind. This remained the situation for more than 100 years. 

Following the founding of the PRC in 1949, the people started large-scale industrial development under the leadership of the CPC. Mao Zedong pointed out that our mission was to "focus on modernizing our industry, agriculture, science, culture, and national defense". China made remarkable progress in its development in the 1950s, but we failed to press ahead with the large-scale industrial development because of the ensuing "Leftist" errors in the Party's guiding thought, culminating in the ten-year-long turmoil of the Cultural Revolution. And there was also the factor of our insufficient understanding of the law of socialist economic development.

The Third Plenary Session of the 11th CPC Central Committee in 1978 started a new historical period of reform and opening up. Over a period of almost 40 years, China has maintained rapid economic growth for a period longer than any other country since the end of World War II. China's economy ranked 11th in the world at the beginning of reform and opening up; it came to the fifth in 2005, ahead of France; it was fourth in 2006, ahead of Britain; third in 2007, ahead of Germany; and second in 2009, ahead of Japan. In 2010, the scale of China's manufacturing surpassed that of the United Sates, ranking first in the world. It took us only a few decades to complete the development course that took developed countries several hundred years, a unique, historic achievement.

As China's economic aggregate continues to grow, we now encounter new developments and new problems. Economic growth stands at a point of gear shift, a point similar to a person's growth – rapid between 10 and 18, and slower afterwards. The economic structure is at a point of adjustment, a time to reduce the excess capacity of low-end industries and to accelerate the development of mid- and high-end industries. It is no longer the case that whatever is produced can be sold for a profit. Economic drivers are to go through transformation. Now that the driving force of low-cost resources and production factors has obviously weakened, we need to find new economic drivers.

We face new challenges to our export strengths and mode of participation in the international industrial division of labor. Such changes are manifested in the new normal.

Since the beginning of reform and opening up, our full and effective utilization of the international market has made an important contribution to our rapid development. Large-scale export and export-oriented development based on China's low labor cost and the relocation of labor-intensive industries from developed countries became an important impetus to our rapid economic growth. From 1979 to 2012, China's export of goods maintained an annual growth rate of around 20 percent, and the country quickly grew into one of the world trading powers.

The rapid development of China's exports also benefited from the heavy and effective demand released over a long period of time by the "golden age" of Western growth. The outbreak of the 2008 global financial crisis put an end to the golden age and ushered in a period of profound adjustment of Western economies. Effective demand dropped, and reindustrialization and industry backflow resulted in increased import substitution. All this directly caused weak growth in demand for China's exports. Western and other countries strengthened trade protectionism – in addition to traditional anti-dumping, countervailing and other measures. They have also created harsher barriers through increased requirements in terms of technical, green, and labor standards. Trade friction has grown due to export restrictions such as export duties and quotas. For nine consecutive years China has been subject to more anti-dumping and countervailing investigations than any other country. At the same time, production costs such as labor have risen in China, and emerging economies such as the ASEAN countries and other developing countries have taken advantage of their comparative strengths in labor cost and natural resources in participating in international division of labor, and industries and product orders are transferring to our neighboring countries, creating further competition for China's exports.

Global trade has entered a downturn – this is a basic feature of world economic development for the present and the foreseeable future. According to statistics, global trade grew faster than the global economy for several decades. During recent years, however, global trade has experienced a marked drop, and for four consecutive years, its growth has been slower than the global economy. After World War II, Germany and Japan each experienced a period of rapid growth in exports to become trading powers. Their experience shows that when export of goods reaches 10 percent of the world's total, there will be a point of inflection when the growth starts to slow down. China's share of world exports was less than 1 percent at the beginning of reform and opening up. It surpassed 5 percent in 2002, exceeded 10 percent in 2010, and reached 12.3 percent in 2014. This means that our exports have come to the point of inflection and it is unlikely that we can maintain high-speed growth in our exports and a high proportion of exports in our GDP. Therefore, we must seek economic engines in innovation and the expansion of domestic demand, especially that of consumption.

When understanding the new normal, we must grasp its essence and overcome some erroneous tendencies.

First, the new normal is not an event, so it cannot be judged as being good or bad. Some ask whether the new normal is good or bad, which is not a rational question. It is an objective situation that our economy will definitely enter in its development. It is an intrinsic necessity, neither a good or bad thing. We should plan, move and advance accordingly.

Second, the new normal is not a basket that can hold everything. It is mainly economic. It should not be misused as a concept; there should not be a host of "new normals" such as cultural new normal, tourism new normal and urban management new normal. Further, negative phenomena should not be denounced as the new normal.

Third, the new normal is not a shield or an excuse for not resolving difficult problems. It does not mean doing nothing, seeking no development, or pursuing no GDP growth. Instead, it means promoting development with more subjective initiatives and more creativity. I have talked about this on many occasions.

Under the new normal, although our economy is exposed to great downward pressure, China is still in a period of strategic opportunity during the 13th Five-year Plan period and beyond. The fundamentals of the Chinese economy remain favorable for long-term growth, and the qualities of good economic tenacity, great potential, and room to maneuver remain unchanged, as do the foundation and conditions supporting sustainable economic development, and the trend of optimized economic restructuring. We must acquire an understanding of these developments, continue to take economic development as our central task, and uphold the strategy that development is the absolute principle. We must seek innovation in the process of development, seek progress in the course of innovation, and seek breakthroughs in making progress, so as to bring our development to a new level.

* Part of the speech at a study session on implementing the decisions of the Fifth Plenary Session of the 18th CPC Central Committee, attended by officials at the provincial/ministerial level.

(Not to be republished for any commercial or other purposes.)