By staff reporter HOU RUILI

CHINA’s economy is going through profound changes, the country’s economic development having entered a “new normal,” according to the Central Economic Work Conference (CEWC) that convened in December 2014. After decades of high growth, the Chinese economy has now entered a period of medium-to-high growth. The emphasis of its development has shifted from quantity and speed to quality and efficiency, and that of its restructuring to improving rather than expanding production practices. The momentum of economic growth will thus come from new sources. Through sustained reform and innovation, China will entrench the decisive role of the market in its economy, stimulating internal growth dynamics. Meanwhile, on the premise of environmental protection, the country will explore new domains of growth, and vitalize the world economy.

New Impetus

To achieve GDP growth of above seven percent this year, the CEWC proposed sustained transformation of the country’s economic development mode and adjustment of its economic structure; also that strategic emerging industries and the service sector play a more supportive role in sustaining economic growth.

During the past five years, seven strategic emerging industries, supported by national policy, have formed China’s new core competitiveness, hedging economic downward pressure and playing a vital role in stabilizing economic growth. These strategic industries include energy-saving and environmental protection, information technology, biotech, advanced equipment manufacturing, new energy, new materials, and new-energy vehicles.

The outstanding performance of emerging industries, such as new generation information technology, high-end equipment manufacturing, new energy automobiles, and energy conservation and environment protection, is expected to continue, according to a report released last December by the CCID Group under the Ministry of Industry and Information Technology. Meanwhile China will, by means of specialized planning, sector funding, merging and reorganization, and policy support, galvanize high-tech industries like integrated circuits, intelligent manufacturing, additive manufacturing, robots, new-energy automobiles, energy conservation, and environmental protection.

Modern service industry has made growing contributions to China’s economic growth. Forecasts show that the tertiary industry proportion of GDP will reach 48 percent in 2015. This is an inevitable increase since China’s economy entered the upper middle-income stage. It is also the natural result of the country’s taking the initiative to restructure its economy in response to reduced international demand due to the international financial crisis. According to Cao Yuanzheng, chief economist at the Bank of China, in the next five years, the service industry’s contribution to GDP will increase to 55 percent, so becoming a proactive force in economic growth.

In addition, industry remains the backbone of economic growth. Industry will achieve transformation and upgrading from the conventional to middle- and high-end sectors, according to the CEWC, driven by personalized consumption demands.

Personalized consumption will become one of the “new normals” of economic development. The wave-type consumption stage, in which the herd mentality dominates, has fundamentally come to an end. Personalized and diversified consumption are set to gradually become the mainstream.

Cao Yuanzheng found that, based on such monthly data as industrial profit, added value and fixed asset investments, 13 industries, including food manufacturing, household consumption, wood processing, fuel gas production and supply, and automobile and instrument manufacturing, will likely score growth above the industry average rate. Pharmacy, comprehensive utilization of waste resources, and non-metallic mineral mining will also realize vigorous growth. In 2015, consumption will contribute some 50 percent to China’s economic growth, according to Cao.

To meet the demands of personalized consumption, traditional industries are likely to revitalize after transformation. Six industrial clusters, namely information, healthcare, culture, high-end equipment manufacturing, new energy, environmental protection, and commercial services, are likely to become new leading forces, according to Chu Jianfang, chief economist at Citic Securities. Meanwhile, along with rapidly increasing demand, financial assets are expected to be Chinese citizens’ first choice for asset allocation.

Emerging industries in the consumption field also have bright prospects. For instance, products such as mobile phones and automobiles will experience rapid expansion to satisfy diversified consumption demands.

The meeting made first mention of the “gray” population, pointing out that future economic growth will rely more on human capital and technological progress. The decline of low-cost labor will accelerate the economic transition into high value-added. The status of human resources will rise among elements of production and in economic growth, but interest rates, an indicator of capital returns, will tend to decline. The meeting also admitted that the environmental carrying capacity is close to its upper limit, signifying the need for accelerated environmental protection and, therefore, greater attention to the quality of economic development.

Reform Dividends

In 2014 China unveiled a series of major reform measures in the fields of fiscal and taxation systems, finance, investment, foreign trade, pricing, state-owned enterprises, and income distribution. They have had positive effects on improving the price mechanism, stimulating market vitality, and reducing inappropriate regulations.

The CEWC proposed speeding up reforms in different areas, including administrative examination and approval, investment, pricing, monopoly industries, franchises, government procurement, the capital market, private bank access, and overseas investments. But the core reform issue remains that of how best to handle the relationship between the government and market. The new formulation is “driving reforms in important fields through the revolutionary reform of the government.” This means advances in both administrative reform and those of fiscal and taxation systems. Breaking the old pattern of interests will resolve local government debts, inefficient investments and other risks.

The CEWC vowed that in 2015, China will maintain the continuity and stability of its macroeconomic policies, and stick to its proactive fiscal policy and prudent monetary policy.

At present, China’s fiscal situation, especially that of the central government, is better than in most Western countries and Japan. The country’s fiscal deficit accounts for just two percent of its GDP. Under the circumstances of high pressure from an economic downturn, when compared with large-scale stimulus and easing monetary policy, strong fiscal policy has relatively smaller side effects, according to Lian Ping, chief economist at the Bank of Communications. Besides, fiscal policy is more effective in adjusting the economic structure. For instance, government funding and policy support can be directed towards certain industries that the state encourages and public infrastructure construction. Supportive public fiscal policy is vital in the transition towards more diversified and personalized consumption, according to Lian Ping. Robust consumption calls for a rational distribution of income, and this can be achieved through tax increases in some sectors.

As regards monetary policy, the CEWC proposed sustained implementation of prudent monetary policy, and more attention to moderation. In other words, monetary policy should be flexible, and make fine timely adjustments.

According to Lian Ping, the traditional pattern of monetary base supply, which is dominated by funds outstanding for foreign exchange, will change; central bank lending combined with innovative monetary tools will become the money supply mainstream.

More stocks and bonds will be issued to support the real economy. China should moreover allow for the rational development of shadow banking.

With regard to state-owned enterprise (SOE) reform, the CEWC said that emphasis should be on invigorating such enterprises and raising efficiency. It is imperative to build a modern corporate system with clearly established ownership, rights and responsibilities, and scientific management. This means that SOE reform will be more practical as it will enhance core SOE competence, rather than merely strengthen supervision and control, according to Li Xunlei, chief economist at Haitong Securities.

Share with the World

The CEWC has redesigned China’s opening-up to the outside world. In light of the new situation, it is vital to strike a balance between domestic and overseas demands, imports and exports, and between inbound foreign investment and China’s outgoing investment. The country will continue to strive towards achieving a basic equilibrium of international payments, and building a new system of open economy.

The “three balances” of market, trade and investment can be achieved through domestic economic restructuring, improving the competitive edge of exports, soliciting high-quality investment, and at the same time increasing the global presence of Chinese corporations.

In the past, China owned few self-owned brands and self-developed export products, most of them confined to the household appliance industry, as exemplified by such firms as Haier, Hisense, TCL, Gree, and Midea, according to Jin Baisong, deputy director of the Institute of International Trade at the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce. The situation has now changed. New Chinese enterprises and brands that have gained world status include Sany and Zoomlion in engineering machinery, Huawei, ZTE and Xiaomi in communications equipment, CSR and CNR in railway industry, BYD, Great Wall, Geely and Chery in automobile industry, Dalian Shipbuilding Industry and Shanghai Waigaoqiao Shipbuilding in shipbuilding industry, and Tencent, Alibaba and JD.com in information industry.

As regards investments abroad, China will focus on increasing the interconnectivity of regional infrastructures, encourage its competitive industries to go global, carry out advanced technical cooperation, and steadily boost internationalization of the RMB. In September 2014, China unveiled the Measures for Overseas Investment Management, an incentive for Chinese enterprises to conduct extensive overseas investment.

To expand exports and increase imports, China will introduce policies to further facilitate international trade, improve the investment climate, increase market access in services, and further open up the manufacturing industry. It will moreover apply the experience garnered from the Shanghai Pilot Free Trade Zone (FTZ) to more parts of the country. At a State Council executive meeting on December 12, 2014, Premier Li Keqiang announced that, in view of the success of the Shanghai FTZ, three new FTZs would be opened in Tianjin Municipality, and Guangdong and Fujian provinces.

In addition, the successful negotiation of the China-Korea and China-Australia FTZs as well as the Beijing Roadmap for APEC to push forward the Free Trade Area of the Asia-Pacific (FTAAP) process all signify that China is proactively participating in the making of international economic and trade rules. China can thus better guarantee its interests amid economic competition and cooperation with foreign countries.

The growth of China’s comprehensive national strength has also achieved a qualitative change in the country’s foreign trade, apparent in its exports, in its corporations’ overseas operations, and in its international cooperation. China’s approach to international economic cooperation is inclusive and win-win.