Chinese Economy under the New Normal Situation

By+ZHANG+XUDONG

IN 2014， the term “new normal” entered dis- course both domestically and globally. It became a popular way to sum up the current features of the Chinese economy and Chinas initiation and gradual deepening of a new round of comprehensive reform against the backdrop of sluggish world economic recovery. Under the new normal situation， China is still confident， and feels capable of steering the world economy on a course of steady progress.

Economic Restructuring

The international community had already begun to discuss the global economy transitioning to a new normal several years before President Xi Jinping used the term to describe Chinas economy. The new normal of the current world economy can be summarized as having four characteristics.

First， since the outbreak of the global financial crisis in 2008， the growth of overall economy and trade has shown signs of an obvious slow-down， and trade protectionism has gained ground. This triggered more friction and imposed pressure on the international governance mechanism to reform.

Second， to cope with the financial crisis and ride out the depression， the concerned countries introduced a flurry of stimulus policies. However， due to excessive leverage and the credit crunch， the policy adjustment space has increasingly narrowed， entailing frequent fine-tuning in the macroeconomy.

Further， since most world economies are undergoing growth adjustment but facing different predicaments due to different development situations， major economies have experienced contradictions in coordinating each others macro-policies.

Lastly， the prosperity of the financial market coexists with the fragility of the real economy. The universal tendency of high unemployment rates and an increasing wealth gap has appeared， and social factors like worsening social inequality have caused frequent political revolts worldwide.

These new situations in the world economy are also noticeably influencing Chinas economy， manifested in the following aspects. First， economic growth driven by heavy investment is hard to maintain. Second， since global trade growth is universally lower than GDP growth， there is no way for trade to become the main engine driving economic growth. Third， upgraded industrial chains are imposing noticeable pressure on the job market. Fourth， the continuous downswing of commodity prices worldwide brings about the risk of deflation.

Under the international new normal situation， influenced by a variety of unfavorable factors， China is at a stage where diversified， deep-seated problems and contradictions surface and are intensified. The miraculous two-digit growth rate is hard to maintain nowadays. Meanwhile， such factors as domestic industrial upgrad-ing and structural adjustment， international energy conservation and emission reduction pressure， and limited space for further adjustment of fiscal and monetary policies necessitate a comprehensive and systematic change to Chinas economy. The change will be embodied in multiple aspects including economic growth， development mode and structure， and motivation force.endprint

The Central Economic Work Conference held in late 2014 summarized four transformations of Chinas economy under the new normal： First， economic growth is shifting gear to a middle to high rate from its former high speed. Second， the economic development mode is intensive rather than extensive， with quality and efficiency at its core， instead of blindly pursuing expanding scales and high growth rates. Third， the economic structure is undergoing a transformation through profound adjustments by making good use of existing production capacities and optimizing newly-expanded ones. Fourth， a new growth point is becoming the development driving force， replacing the traditional one.

Chinas economic structural reform will be long-term and historic. Reviewing Chinas economic performance in 2014， although there were both encouraging and frustrating results， several highlights stand out.

In 2014， Chinas economic growth dropped to 7.4 percent， a record low since 1990. It is widely believed in the international community that the downward trend of Chinas economic growth will continue. The International Monetary Fund （IMF） even adjusted its prediction of Chinas economic growth in 2015 to 6.8 percent.

The drop in Chinas economic growth is not only a result of negative international factors， but also ascribable to the Chinese governments initiative regulation and policy adjustment. Moderately eased growth could create more space for reform， which would ameliorate the supply-demand relationship and relieve the environmental load， thus contributing to a healthier economic structure.

Whats encouraging is that a lot of economic indexes in 2014 demonstrated positive results of the countrys comprehensive reform， which has consolidated decisionmakers confidence in advancing the reform to deeper waters. In 2014， Chinas new jobs in urban areas stood at 13.22 million； the number in 2013 was 13.1 million. In terms of resident income， in 2014， Chinas per capita income reached US $3，245 with a growth of 8 percent， higher than the speed of Chinas GDP. Moreover， Chinas Gini coefficient was 0.469 in 2014， and while this figure is still high， it has fallen for six consecutive years. The urban and rural income ratio also declined to 2.75 from 3.03 in 2013. These figures indicate that the dividend of Chinas overall development is benefiting more and more people. In addition， Chinas absorption of foreign investment has led the developing world for a straight 23 years as the gap between China and the U.S. in this regard narrows further. More regions of the country have attracted foreign investment and there is a better balance of regional distribution of such investments.endprint

No Easy Feat

The overall satisfactory economic operation in 2014 doesnt automatically imply that Chinas task of economic development in 2015 will be easy. On the contrary， China is actually embarking on a tough journey to realize economic transformation. As the “old normal”is broken down and economic growth slows， China is endeavoring to establish a new normal and improve economic efficiency.

At the beginning of 2015， Chinas sluggish trade deeply reflects the overall world situation. In response， developed economies like Japan， the Eurozone and Australia have taken measures such as lowering interest rates and introducing quantitative easing （QE） to depreciate their currencies. If more and more economies follow suit， a depreciation competition could ensue， and cause unprecedented market fluctuations. A huge amount of hot money would then create a heavy asset bubble which could eventually crush some developing countries and emerging economies. This explains why the move by the Peoples Bank of China in February to lower the deposit reserve ratio by 0.5 percentage points and infuse RMB 600 billion into the market in a bid to alleviate capital shortage caused such a fuss.

Globally， Chinas economic transformation is also a big concern for the international community. Observers who have in-depth knowledge of Chinas reform and openingup drive and， therefore， are confident in the governance ability of Chinas government， generally hold a positive view on Chinas economic transformation. Their analyses have not been confined to Chinas economic growth or several economic indexes， but tend to predict the countrys economic development trend based on those indica- tors that reflect results of Chinas reform， like employment and per capita income.

Jim O Neill， former chief economist of Goldman Sachs who coined the term BRICs， ascribes his optimistic view about Chinas economy to the following three reasons： The slump in the price of oil would increase the real income of consumers， which is conducive to a boom in Chinas consumption market. In addition， falling prices in the real estate market would not trigger a credit crisis， but stimulate purchasing power. Finally， Chinas inflation has been moderate， and its monetary policy has great flexibility. If the increase in peoples income is to be sustained， property rights of migrant workers guaranteed， and reform of the retirement security system advanced in the future， Chinas economy will continue to lead the world at a growth rate of 6-7 percent.endprint

Some observers like Shannon Tiezzi， an associate editor at The Diplomat of Japan， hold the view that in 2015 the main battlefield for Chinas reform will be in stateowned enterprises （SOEs）. Data from The Economist indicate that since the financial crisis in 2008， the average profitability of Chinas SOEs has been declining despite Chinas relatively rapid economic development. Currently， the return on investment （ROI） stays around 5 percent for SOEs， but for private companies， ROI surpassed 9 percent. In addition， SOEs have long been infested with serious corruption. Therefore， to root out corrupt officials in SOEs is just the first step of a tough reform task； upgrading their efficiency and ROI， and shaping SOEs into the real pillar of the national economy is the actual aim of the reform. Hence， establishing the modern corporate system and guaranteeing a fair market competition environment is what the reform should be targeting.

Some observers represented by the investment banker Christopher Whalen hold that Chinas desired economic growth mode with consumption as the major driving force would be distinctly different from the Western one.

Meanwhile， other commentators propose tactics for Chinas reform. For example， Bloomberg View columnist William Pesek observed that Chinas government should stop setting yearly economic growth targets so as to free all-level governments from the trammels of achieving them. Besides， growth targets confuse market expectations and are likely to prompt local governments to expand debt and stimulate the economy through investment， thus glossing over their work performance.

Another group of scholars is trying to analyze Chinas economic prospect by examining the countrys domestic and foreign policies. Zheng Yongnian， director of the East Asian Institute at the National University of Singapore， holds that Chinas development experience and capacity， accumulated since its reform and opening-up drive kicked off， have provided China a historic opportunity to achieve a rebalance of the world economy. It is expected that the Belt and Road Initiatives will be the main impetus for Chinas realization of sustainable development and a peaceful rise， the first measure of its kind in quite some time.

Deepen Reform

China is at a stage of shifting growth gear， economic restructuring and policy adjustment， which impacts Chinas economic operation and will do so for some time. To further advance the economic reform， China should properly handle the above-mentioned economic situations.endprint

The new normal for Chinas economy will be an upgraded economy with a sound， optimized structure and intricate division of labor. In 2015， China should advance certain major reforms and try to implement multiple major measures in the phase of constructing its reform framework.

First， reform in key fields should be furthered， in particular reform of the administrative approval system， which should be advanced more deeply and widely. While streamlining administration and delegating power to the lower levels as well as cracking down on corrup- tion， China could better deal with the relationship between the market and the government to unleash market vitality. Second， China should advance finance and tax reform. In the financial field， financial budgets should be open to public scrutiny in an all-around way， and more financial input should be directed to public products and services. Meanwhile， multi-level capital markets should be nurtured， providing more support for small and mediumsized banks and private banks. Third， a market environment of fair competition should be created as the government plays the role of market supervision. Fourth， the system of opening-up should be improved to explore the management mode of pre-entry national treatment plus negative list and expand opening-up in the service industry and foreign investment access system. Lastly， environmental protection reforms should be furthered. In endeavoring to achieve emission reductions and tackle global climate change， China will shoulder its international responsibilities. In addition， China will learn from international experience in such fields as fighting against regional and systematic financial risks.

In brief， Chinas government has won its peoples confidence by deepening reform through actual achievements. This has allowed China the political space to cope with more demanding challenges of reform， and will ensure that Chinas economy will continue to be a major engine of the global economy.endprint