Economic Work Should Be Adapted to the New Normal*

December 9, 2014

To improve our economic work, first of all, we should have a rational understanding of the current situation and a sound assessment of future trends. Recently, there have been comments both in and outside China: As China's economic growth slows down, is there anything wrong? The growth rate has dropped to below 7.5 percent – why not take stimulus measures? I think that to look at and analyze this question, we must understand China's various economic development stages from historical and dialectical viewpoint.

Last year, the central government decided that China's economic development is at a stage of shifting the growth rate, restructuring the economy, and addressing the impact of previous stimulus policies. In the middle of this year, at a meeting of the Political Bureau of the CPC Central Committee, I further analyzed this complex economic stage, emphasizing that our economic work should be adapted to the new normal. Not long ago, at the 2014 APEC CEO Summit in Beijing, I briefly analyzed the characteristics of the new normal in China's economic development – a slowdown in the rate of growth, optimization of economic structure, and shift of growth engines. Here, through comparison, I would like to talk about several trends brought by the new normal.

First, consumption. Consumption in China used to flow in waves, as large numbers of consumers would follow the latest fad in an attempt to "keep up with the Joneses". Now this sheep-flock effect has disappeared, and the stage of consumption in waves has ended. Differentiated, individualized, and diversified consumption has become the norm. There is more emphasis on product quality and safety, and demand stimulated by innovative supply is growing in importance. Since incomes have improved and the pattern of consumption has changed, adjustments in the supply system are imperative. Moreover, the 1.3 billion Chinese have tremendous potential to improve their overall consumption capacity. We must adopt sound policies to release consumption potential, allowing consumption to continue to drive economic development.

Second, investment. China used to have a huge demand in investment. As long as we had funds and entrepreneurship, we always gained investment returns. Investment was vital to economic growth. Now, through over 30 years of high-intensive and large-scale development and construction, investment in traditional industries and real estate has reached capacity. But infrastructure connectivity, new technologies, new products, new industries, and new business models present new investment opportunities, and demand new means of investment and financing. China's gross saving rate remains high. We must find the right direction and eliminate barriers for investment, so that investment can continue to boost economic growth.

Third, exports and balance of payments. Before the global financial crisis, international markets were expanding rapidly. As long as there were cost advantages, exports could be expanded. Exports were a major engine for China's rapid economic growth. Now, since global aggregate demand is sluggish, China's comparative low-cost advantage is receding. China is still competitive in exports, and its share in international markets gained through years of effort is an important resource. At one and the same time China is going out on a greater scale, and bringing in products of higher technology. The Renminbi is now well-received and circulated internationally; the current account surplus and capital account surplus are approaching balance between revenues and expenditures. We must foster new comparative edges; we must vigorously participate in revising the rules of international trade and investment, so that our exports can continue to support economic growth.

Fourth, production capacity and industrial structure. China's main problem used to be undersupply. Now the supply capacity of traditional industries has exceeded demand. The industrial capacity of steel, cement, and glass industries is approaching a peak, real estate is facing structural and regional overcapacity, and the planned construction area of development zones, industrial parks, and new urban districts has exceeded actual demand. Confronting overcapacity, we must upgrade our industrial structure, merge and reorganize enterprises, and promote concentration of production. IT technology is developing quickly in innovative directions; emerging industries, service industries, small and micro businesses are playing a more prominent role; small-scale, intelligent, and specialized production will become a new feature of industrial structure.

Fifth, the comparative advantages of production factors. China used to have a wealth of new labor and surplus rural labor; our low labor cost was our biggest advantage; introduced technology and management were quickly transformed into productivity. Now, due to population aging, the gross working-age population is falling in number; rural surplus labor is decreasing; the level of technology innovation in many fields is lagging behind that of our advanced international competitors. Deprived of key technology for upgrading the economy, we suffer from weakened influence of production factors. As the quality of production factors improves, economic growth will rely more on the quality of human capital and progress in technology, so innovation must become a new growth engine.

Sixth, market competition. Increases in quantity and price competition used to dominate. Now, it is turning to competition in quality and product differentiation. Consumers tend to value quality and individualized products, so we must identify potential demand and meet it through innovative supply. Enterprises acquire competitive edge through preferential policies on taxation and land use; the policy of preferential taxation on foreign-funded enterprises over domestic enterprises can no longer be sustained. Therefore, a single national market and high resource allocation efficiency are essential to economic development. We must drive deeper reform and opening up, and develop a single, transparent, well-organized, and procedurebased market environment, so as to create favorable conditions for full market competition.

Seventh, resource and environment constraints. China used to have sufficient energy and resources and extensive eco-space, which allowed large-scale and rapid development. Now, the carrying capacity of our environment is approaching or has reached the limit, and there is no longer the potential for high-consuming, extensive development. The people are desperate for clean air and water, a healthy environment, and other eco-products, so the eco-environment is becoming increasingly valuable. We must meet the public demand for a good eco-environment, and promote a new eco-friendly and low-carbon development model, and thereby create new growth areas.

Eighth, the accumulation and defusing of risks. China's rapid economic growth has indeed concealed certain conflicts and risks. Now, as the growth rate slows down, hidden risks are becoming evident. Local government risks concerning debt, shadow banking, and real estate are becoming apparent; structural risks also exist in employment. These risks come from excessive government intervention in economic restructuring, from blind investment by market entities during economic prosperity, from excessive promises due to shortsightedness, or from the shock of the global financial crisis. From a holistic view, the risks confronting us are under control, but we need some time to defuse threats in the form of high leverage and economic bubbles. We must "find the correct prescriptions to treat both symptoms and root causes", establish and improve the mechanisms to defuse the various risks we face, and mitigate the shock of one-off risks by giving ourselves the time to deal with them. When threatened by systemic risks, we should operate on such risks as if we were carrying out surgery.

Ninth, the resource allocation model and the means of macro- economic control. China used to have huge growth potential in aggregate demand. Keynesian economics alone were effective in stimulating China's economic development. Our shortcomings in economic growth were quite evident, and following the Flying Geese Paradigm implemented by pioneering countries, our industrial policies were capable of developing comparative advantages. Now, from the perspective of demand, the marginal effects of comprehensive stimulus policies are diminishing; from the perspective of supply, we should resolve overcapacity on the one hand, and use market mechanisms to identify the future direction for industrial development on the other. We must be fully aware of the changes in the demand-supply relationship. We must conduct reasonable macroeconomic control. We must conduct proper and targeted intervention. We must take resolute and moderate measures when necessary. We must balance our efforts to invigorate the market and create a favorable environment. In this way, we can form a new growth model which can balance the roles of market and government intervention.

In this complex economic situation, the above-mentioned changes indicate that China's growth rate will definitely drop but within acceptable limits. Economic restructuring will be painful but is unavoidable. Addressing the impact of previous incentive policies is necessary, and the impact from various risks can be mitigated and defused through effective guidance. All this confirms that China's economy is evolving to a model that is more advanced, better structured, and with more complicated division of labor. These changes are both the features and the causes of the new normal. Some might be reinforced; others might be amended.

In general, since China entered the new normal of economic development, its growth rate has shifted from 10 percent to about 7 percent – from high speed tomedium-to-high speed. The growth pattern is changing from large-scale and high-speed extensive growth to high-quality and efficient intensive growth. The economic structure is being transformed from quantitative increase and expanding capacity to adjusting stock while optimizing increment. Growth engines are turning from traditional areas to new ones. Entering the new normal manifests the inevitable periodic nature of China's economic development. Understanding the new normal, adapting ourselves to the new normal, and guiding the new normal are major tasks in the present and future stages of our economic development.

"Limitations lead to change; changes lead to solutions; solutions lead to development."¹ We should be adaptive as we face the new normal. We should fully understand it, adopt the right measures, and make concrete efforts, so as to keep pace with the times in our economic work.

We must have a deep and shared understanding of the new normal. It is simplistic to regard economic development merely as quantitative change and repetition. We should think and act according to the decisions of the Central Committee, enhancing our awareness and creating the initiative to accelerate the transformation of the economic growth model. If we fail to see the new changes, new situations, and new problems – or even worse, deny them – and if we stick to the old extensive and high-speed development model and launch projects impulsively, that is a sign that we cannot keep up with the new situation. The old way might raise the rate of growth, but it will not work for long; on the contrary, it will simply intensify and ultimately ignite the conflicts accumulated in development.

Facing the new normal, we should take proactive measures to boost development. As I have repeatedly emphasized, taking economic development as the central task is vital to national rejuvenation. Development is the CPC's top priority in governance – the basis and the key to resolving all the country's problems. Moreover, I have also emphasized repeatedly that what we need is quality, profitability, and sustainable development; what we need is development supported by full employment, high productivity, high investment returns, and high resource allocation efficiency. We cannot measure development simply by GDP. Therefore, we will have to carry out our economic work properly, and estimate the economic situation correctly. It is not true that if growth speeds up, the economic situation is good, and if growth slows down, the economic situation is bad. Actually, it is normal for the rate of growth to rise and fall – the rules of economic development do not permit zero economic fluctuation. As long as any fluctuation is within an acceptable range, we should remain calm, noting that we have the initiative to take macroeconomic measures. We should stay alert against peril, but we must not overreact.

Note this well: China has entered the new normal of economic development. This does not alter the fact that we have a strategic opportunity to accomplish great deeds; what it changes is the content and conditions of this strategic opportunity. This does not negate the overall favorable trend in our economic growth; what it changes is our growth model and economic structure. As to the changes in conditions for development, we must have an accurate, in-depth, and thorough understanding, and act when conditions permit. We must improve the quality and the benefits of growth, and accelerate strategic economic restructuring. We must satisfy the people's demands, improve our analysis of market and consumer psychology, and upgrade our guidance of social expectations. We must strengthen the protection of property rights and intellectual property rights, explore the talent of entrepreneurs, and improve education and the quality of our human capital. We must promote ecological progress, advances in science and technology, and all-round innovation. To achieve these, the key lies in our efforts to drive deeper reform, to implement the strategy of innovation-driven development, and to resolve problems in development. Therefore, we must advance reform and innovation, accelerate the transformation of the growth model, and make concrete efforts to adapt our growth engines, so as to open up a new social and economic situation at a new historical threshold.

* Part of the speech at the Central Conference on Economic Work.

Notes 

¹ Book of Changes (Yi Jing).

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