The New Normal: How to Respond and Adapt*

December 18, 2015

I

How should we respond to the new normal? China's economic development is now in the new normal. This conclusion is drawn from analyzing the world economic cycle, China's development stage, and the interaction between the two. This conclusion has been widely recognized by the rest of the world. According to the IMF, China's economic development is in the new normal, so is global economic development. We must act as the conditions permit. As the Chinese economy is in a stage of shifting the growth rate, restructuring the economy, and addressing the impact of previous incentive policies, we should see the new normal from the following perspective.

First, we must have a correct and full understanding of China's economic development. An ancient scholar said, "Everything exists for a reason."¹ The growth pattern in our country is evolving from an extensive economy to an intensive economy; the division of labor is changing from simple to complex. This is an objective law, and we cannot go against it no matter what we think. The extensive economy once played a great role in accelerating China's economic growth. But now neither the domestic nor international environment allows China to maintain this mode of unsustainable economic development. If we do not change it, we will hit the buffers. We must be fully aware of this point.

To release the great potential and strengths of the Chinese economy, we must move faster in changing the growth model, restructuring the economy, and fostering new growth drivers. By changing the economic growth pattern, we can realize sustained and higher-level development. This is essential if a middle-income country is to skip the middle-income trap. I have emphasized repeatedly that we must escape the Thucydides Trap and the middle-income trap. The former is related to the political sphere – we should carefully tackle the relationships with other major countries such as the United States. The latter is about the economy – we must improve the quality and effectiveness of economic growth. The latter was emphasized at the Fifth Plenary Session of the 18th CPC Central Committee in 2015, and we were required to change the economic growth model and restructure the economy more quickly.

We should have a deeper understanding of this complicated stage of economic development and the new normal, abandon the old ways of thinking and approaches that were pursued to realize rapid growth, and align our thoughts and actions with the decisions, policies, and plans made by the Central Committee.

Second, we must overcome difficulties and pass through this critical stage of economic development. We should see the Chinese economy dialectically. On the one hand, it is basically positive, having great potential, being tenacious and adaptive, with strong new growth drivers and new forms of businesses emerging; many industries in numerous regions are witnessing gratifying changes and have a promising future. On the other hand, it is also facing difficulties and challenges, especially structural overcapacity.

After the founding of the PRC in 1949, the CPC promoted industrialization. In spite of all its difficulties, China laid the early foundations for industrialization. Since reform and opening up began in 1978, China's capacity has boomed in all industries. Much of this capacity was achieved during the golden era of global economic growth to meet international demand, and in a period of rapid domestic growth. To respond to the shock of the global financial crisis in 2008, capacity in some industries was inflated. Now, as technological change accelerates and the consumption model updates, while international market growth is slowing, much of China's industrial capacity has peaked. Some capacity cannot find markets, while production costs are rising, resulting in the decline of the marginal profit ratio and the average profit ratio in the real economy. China is not the only case in the world. It is for this reason that a large amount of finance is flowing to the virtual economy. This causes expanding asset bubbles, emerging financial risks, and poor overall circulation of production, products, distribution, and consumption.

This is an inevitable historical stage. As long as we accelerate reform and innovation, we will pass through it successfully. If we fail to make strategic adjustments at this critical moment, fail to get rid of the old and build the new, we will not cross this hurdle, and the accumulated problems will hinder the realization of the overall objective.

Third, we must be bold in promoting reform and innovation. The difficulties and problems we are facing were indeed partially caused by the global financial crisis, but there are root causes that play a decisive role. These are the supply-side, structural, and institutional conflicts. We should free our minds, be realistic, and keep pace with the times. Upholding the philosophy of innovative, coordinated, green, open, and inclusive development, we should create new theories on innovation, devise far-sighted policies, strengthen structural reform, reallocate misplaced factors of production, increase effective supply, make the supply structure more adaptive and flexible, and improve total factor productivity.

Our current problems are not periodic and we cannot trigger a V-shaped rebound through short-term stimulus. The phase of L-shaped growth for China might be long. We must be ready for a time-consuming process, be ready for hardships and setbacks, be reasonable in our expectations while the growth rate shifts, and wait for the growth rebound. We should confront difficulties, stay on the right course, remain confident, and work together to foster greater institutional impetus and vitality, thereby releasing our great potential for economic growth and bringing the economy to a higher level of development.

II

How should we adapt to the new normal? Specifically, we should shift the focus of our work in the following respects.

First, we should promote economic development by improving quality and effectiveness. The measurements for this are returns on investment, markets for products, profits for enterprises, income for employees, tax revenues for government, and an improved environment. This is the development we are expecting. We need a reasonable growth rate. In addition, the measurement of economic achievement should be changed from high growth rate to high development quality and effectiveness.

Second, we should ensure steady growth by promoting supplyside structural reform. During this stage of shifting the growth rate, restructuring the economy, and addressing the impact of previous incentive policies, the problems hindering growth are not only about economic aggregate but also structural conflicts. Since effective supply cannot adapt to the changes of aggregate demand and structure, to maintain steady growth, we must expand aggregate demand and adjust the demand structure to a proper extent, and at the same time, promote supply-side structural reform, so as to achieve highlevel balance between supply and demand.

Third, we should implement macroeconomic control by imposing positive influence on market. When carrying out macroeconomic control, we should pay close attention to and guide market anticipation and realize counter-cyclical goals. We should study the market anticipation and social mentality hidden in consumption and investment behavior, reflect on the features of market behavior of major actors, increase policy transparency and predictability, communicate and reach consensus with major actors of market behavior, strengthen international exchanges on these policies, and make macroeconomic control more reasonable and adaptive.

Fourth, we should employ multiple means to restructure industries. As capacity in many industries has reached its peak, if we do not reduce it and allow prices to fall steadily, competitive enterprises might collapse. We should encourage economic increment and foster new growth impetus; we should take the initiative to reduce over-capacity and weed out inferior capacity so as to realize the principle of the survival of the fittest; we should promote innovation as the primary driving force for development, implement important technology projects, make breakthroughs in key technologies, boost high-tech economic development, and increase productivity and the returns on investment. We should strengthen vocational training to improve the quality and structure of human resources.

Fifth, we should advance urbanization by putting people first. The essence of urbanization is to bring more people to settle in urban areas. We should encourage those rural households which are capable of maintaining a stable job and life in urban areas to relocate there. In this way, we can achieve a steady increase in the labor supply, reduce the pressure of the rising labor cost, and expand consumption in real estate and other fields. This is also the fundamental solution to narrow the urban-rural gap, promote urban and rural integration and agricultural modernization.

Sixth, we should promote regional development with a spatial balance between population, the economy, resources, and the environment. We should balance the economy and population between regions, and narrow the regional gap of per capita GDP; we should also ensure that the capacity of resources and environment is able to support regional economies and populations, and narrow the gap between the two. According to the regional zoning plan, we should coordinate development between geographical areas by ensuring that factors of production move freely and in a well-ordered way, principal zoning is effectively implemented, basic public services are equally available, and neither environmental nor resource carrying capacity is exceeded.

Seventh, we should protect the environment and form green production models and consumption patterns. To preserve our green mountains and clear waters, we should tackle ecological problems at source and foster endogenous impetus. We should proceed on the path of green, circular, and low-carbon development, build a green industrial system and spatial pattern, encourage green ways of production and life, and promote harmonious coexistence between man and nature.

Eighth, we should improve the people's wellbeing, taking targeted measures to help specific groups with special difficulties. On the basis of economic development, we should increase the quantity and quality of basic public services such as education and healthcare, and promote equal access to education. To take targeted measures to help specific groups, we should spend funds in addressing their particular problems, providing them with a sense of gain, and ensuring that their capability to develop will improve and be passed on to future generations.

Ninth, we should enable the market to play a decisive role in resource allocation. We should value and release the vigor of micro units. The government should intensify its efforts to do things that cannot be done by the market, and fulfill its responsibilities on macroeconomic control, market supervision, public services, social management, and environmental protection.

Tenth, we should open wider to the outside world, in particular by promoting high-level mutual opening. We should remain committed to the mutually beneficial strategy of opening up, coordinate domestic and external demand, balance imports and exports, give equal importance to bringing in and going global, attract investment, technology, and outstanding professionals, take an active part in global economic governance and the supply of public goods, and have more say in the formulation of global rules.

To sum up, it is essential that we adapt to the new normal. Supply-side structural reform is an ideal innovative means of doing this. It is also the choice we have made to adapt ourselves to the new demands of international competition in the aftermath of the global financial crisis. Let us work together to achieve this goal.

* Excerpts from the speech at the Central Conference on Economic Work.

Notes 

¹  Ye Shi: Comments on the Pre-Qin Classics (Xi Xue Ji Yan Xu Mu). Ye Shi (1150-1223) was a thinker and writer of the Southern Song Dynasty.

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