A Preliminary Study on the New Normal of China's Economy (Research Series on the Chinese Dream and China’s Development Path) [1st ed. 2021] 9811653356, 9789811653353

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Research Series on the Chinese Dream and China’s Development Path

Jun Wang

A Preliminary Study on the New Normal of China’s Economy

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

More information about this series at http://www.springer.com/series/13571

Jun Wang

A Preliminary Study on the New Normal of China’s Economy

Jun Wang Beijing, China Translated by Xiaonan Zhang

ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-16-5335-3 ISBN 978-981-16-5336-0 (eBook) https://doi.org/10.1007/978-981-16-5336-0 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. © Social Sciences Academic Press 2021 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Series Preface

Since China’s reform and opening began in 1978, the country has come a long way on the path of socialism with Chinese characteristics, under the leadership of the Communist Party of China. Over 30 years of reform, efforts and sustained spectacular economic growth have turned China into the world’s second largest economy, and wrought many profound changes in the Chinese society. These historically significant developments have been garnering increasing attention from scholars, governments, and the general public alike around the world since the 1990s, when the newest wave of China studies began to gather steam. Some of the hottest topics have included the so-called “China miracle”, “Chinese phenomenon”, “Chinese experience”, “Chinese path”, and the “Chinese model”. Homegrown researchers have soon followed suit. Already hugely productive, this vibrant field is putting out a large number of books each year, with Social Sciences Academic Press alone having published hundreds of titles on a wide range of subjects. Because most of these books have been written and published in Chinese, however, readership has been limited outside China—even among many who study China—for whom English is still the lingua franca. This language barrier has been an impediment to efforts by academia, business communities, and policy-makers in other countries to form a thorough understanding of contemporary China, of what is distinct about China’s past and present may mean not only for her future but also for the future of the world. The need to remove such an impediment is both real and urgent, and the Research Series on the Chinese Dream and China’s Development Path is my answer to the call. This series features some of the most notable achievements from the last 20 years by scholars in China in a variety of research topics related to reform and opening. They include both theoretical explorations and empirical studies, and cover economy, society, politics, law, culture, and ecology, the six areas in which reform and opening policies have had the deepest impact and farthest-reaching consequences for the country. Authors for the series have also tried to articulate their visions of the “Chinese Dream” and how the country can realize it in these fields and beyond. All of the editors and authors for the Research Series on the Chinese Dream and China’s Development Path are both longtime students of reform and opening and v

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recognized authorities in their respective academic fields. Their credentials and expertise lend credibility to these books, each of which having been subject to a rigorous peer review process for inclusion in the series. As part of the Reform and Development Program under the State Administration of Press, Publication, Radio, Film, and Television of the People’s Republic of China, the series is published by Springer, a Germany-based academic publisher of international repute, and distributed overseas. I am confident that it will help fill a lacuna in studies of China in the era of reform and opening. Shouguang Xie

Contents

1 Historical Significance and Features of China’s Economic New Normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 China’s Economic New Normal: Coinage of the Notion and Its Global and Domestic Context . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 The Global Economy Is Undergoing Profound Changes and Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Economic Globalization and Regional Economic Integration Are Gathering Pace . . . . . . . . . . . . . . . . . . . . . . . . 1.1.3 The Third Industrial Revolution Is Well Underway . . . . . . . . 1.1.4 Foreign Demand Is Recovering Slowly, and Trade Protectionism Is Rising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.5 China’s Economy Is at a Complex Stage of Shifting the Economic Growth Rate, Restructuring the Economy, and Addressing the Impact of Previous Stimulus Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.6 The Service Industry Has Become an Important Source of Impetus for Economic Development . . . . . . . . . . . 1.2 Main Features of China’s Economy Under the New Normal . . . . . . 1.3 Historical Significance of the New Normal in China’s Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Transformation of the Economic System: Decisive Role of Market in Resource Allocation . . . . . . . . . . . . . . . . . . 1.3.2 Transformation of Driving Forces for Economic Development: New Drivers for Development . . . . . . . . . . . . . 1.3.3 Transformation of the Economic Development Model: Innovation-Driven Development . . . . . . . . . . . . . . . . . 1.3.4 Transformation of the Goal of Economic Development: People-Oriented Development . . . . . . . . . . . . . 2 New Normal: Slower Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 China’s Economic Slowdown from Medium- and Long-Term Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.1.1 China’s Economic Development Since 1978 . . . . . . . . . . . . . 2.1.2 Driving Forces for China’s High-Speed Economic Growth from 1978 to 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Causes and Nature of China’s Economic Slowdown Since 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Direct Cause of China’s Declining Growth Rate: Cyclical Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Fundamental Cause of China’s Declining Growth Rate: Structural Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Economic Growth in the Medium and Long Term Is Hindered by Slow Pace of System Reforms . . . . . . . . . . . . . . 2.2.4 The Downturn in Growth Rate of Total-Factor Productivity Caused by Insufficient Innovation Capacity Has Negative Impact on Economic Growth . . . . . . 2.2.5 Rising Resource and Environment Constraints Lead to Negative Externalities on Economic Growth . . . . . . . . . . . 2.2.6 China’s Economy Is Growing at Slower Pace But with Higher Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Analysis of China’s Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . 3 New Normal: Structural Upgrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Imbalance in Industrial Structure and Improvement Measures: Transformation from a Country with Large Industry to a Country with Strong Industry and Service Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Imbalance Between Urban and Rural Areas and Between Regions and Improvement Measures: Preliminary Success in Addressing the Growing Gap and Imbalance . . . . . . . . . . . . . . . . . 3.2.1 The Urban-Rural Gap Is Narrowing . . . . . . . . . . . . . . . . . . . . . 3.2.2 The Government Is Placing Greater Emphasis on Top-Level Design and Coordinated Regional Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Imbalance in Income Distribution and Improvement Measures: The Gap Is Narrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 China’s Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Causes of the Income Gap in China’s Household Sector . . . 3.4 Unbalanced Investment-Consumption Structure and Improvement Measures: Consumption Has Become a Driving Force for Development, Economic Rebalancing Remains an Arduous Task . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 The Final Consumption Rate Is Extremely Low, While the Investment Rate Remains High . . . . . . . . . . . . . . . . 3.4.2 Growth Rate of Gross Capital Formation Is Higher than That of Final Consumption Expenditure and Economic Growth Most of the Time . . . . . . . . . . . . . . . .

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3.4.3 Anemic Consumer Demand as Shown in Unbalanced Consumption Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.4 Capital Formation Outperforms Final Consumption in Terms of Contribution to Economic Growth After Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.5 In China, Consumption Rate Is Significantly Lower than Global Average and Growth Rate of Consumption Is Lower than GDP Growth Rate, Which Deviates from the General Trend and Standard Structure of Economic Development . . . . . . . . . . . . . . . . . . . . 3.4.6 The Unbalanced Proportions of Investment and Consumption and Structural Distortion in Investment and Consumption Have Severe Negative Impact on China’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.7 Causes of Low Consumption Rate and High Investment Rate in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Imbalance Between Domestic and Foreign Demands and Improvement Measures: Imbalance Between Domestic and Foreign Demands and Incoordination Between Development of Domestic and Foreign Trade Are Alleviated . . . . . . 4 New Normal: Innovation-Driven Development . . . . . . . . . . . . . . . . . . . . 4.1 The Current State and Problems of Science and Technology in China, and Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . 4.1.1 The Current State of Science and Technology in China . . . . 4.1.2 Prominent Problems with Innovation in China: Insufficient Capability to Conduct Independent Innovation and Major Deficiencies in the System for Independent Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 Challenges and Opportunities in China’s Development of Science and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Concept of Innovation and Advice on Implementation of the Innovation-Driven Development Strategy to Make China an Innovative Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 We Must Have a Comprehensive and Accurate Understanding of the Concept of Innovation . . . . . . . . . . . . . 4.2.2 Build an Innovative Country by Implementing the Innovation-Driven Development Strategy . . . . . . . . . . . . .

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5 Regional Coordination Under the New Normal . . . . . . . . . . . . . . . . . . . . 101 5.1 Promote Coordinated Regional Development, and Improve the National Distribution of Productive Forces . . . . . . . . . . . . . . . . . . 102 5.1.1 Goals of Coordinated Regional Development and National Distribution of Productive Forces in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

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5.1.2 Current Conditions and Problems in China’s Pursuit of Coordinated Regional Development . . . . . . . . . . . . . . . . . . 5.1.3 New Situations and Features of Coordinated Regional Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.4 Main Principles of Coordinated Regional Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.5 Policy Advice on Coordinated Regional Development and National Distribution of Productive Forces . . . . . . . . . . . 5.2 A New Strategy for Regional Economy Featuring Interaction and Coordination Between Regions in China and Between China and the Rest of the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Jointly Build the Belt and Road to Build a Community with a Shared Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Upgrade Beijing-Tianjin-Hebei Coordinated Development as a National Strategy . . . . . . . . . . . . . . . . . . . . 5.2.3 Encourage the China (Shanghai) Pilot Free Trade Zone to Conduct Bold Trials, Experiments and Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Seek New Growth Drivers for Regional Development Through Comprehensive Opening-Up . . . . . . . . . . . . . . . . . . . 5.2.5 Continue to Pursue Coordinated Regional Development Through Interaction and Coordination Between Regions in China and Between China and the International Community . . . . . . . . . . . . . . . . . . . . . . . 6 Reform of Systems Under the New Normal . . . . . . . . . . . . . . . . . . . . . . . 6.1 Major Theoretical Innovations of the Third Plenary Session of the Eighteenth CPC Central Committee . . . . . . . . . . . . . . . . . . . . . 6.1.1 For the First Time, the Decision Specifies the Overall Goal of Deepening the Reform Comprehensively, and the Timetable and Road Map for Achieving the Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 The Decision Places Great Emphasis on Giving Full Play to the Catalytic Role of Economic Reforms . . . . . . . . . . 6.1.3 For the First Time, the Decision Requires That We Should Let the Market Play the Decisive Role in Allocating Resources and Let the Government Play Its Functions Better . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.4 For the First Time, the Decision Points Out That Both the Public and Non-public Sectors Are Important Components of the Socialist Market Economy, and Important Bases for China’s Economic and Social Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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6.1.5 For the First Time, the Decision Points Out That Finance Is the Foundation and an Important Pillar of National Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.6 For the First Time, the Decision Points Out That We Should Improve the Property Rights System for Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Accelerate the Reform of the Fiscal and Taxation Systems . . . . . . . . 6.2.1 Problems with China’s Fiscal and Taxation Systems . . . . . . . 6.2.2 Key Tasks in the Reform of the Fiscal and Taxation Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 A New Round of Tax Reforms . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Deepen the Reform of the Financial System . . . . . . . . . . . . . . . . . . . . 6.3.1 Deepen the Reform of Financial Institutions, Break the Financial Monopoly, and Promote the Development of Rural Finance and Private Finance . . . . 6.3.2 Accelerate the Development of a Multi-tiered Financial Market System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Improve Financial Regulation and Supervision . . . . . . . . . . . 6.4 Perception of the Mixed-Ownership Reform of SOEs and Advice on the Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Understand the Core of the Mixed-Ownership Reform: Eliminate the Ownership Discrimination . . . . . . . . . 6.4.2 Problems That Require Immediate Solution in the Mixed-Ownership Reform . . . . . . . . . . . . . . . . . . . . . . . 6.4.3 Advice on Deepening the Mixed-Ownership Reform of SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Opening-Up Under the New Normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Growing Connectivity and Interaction Between China’s Economy and the World Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Connectivity and Interaction in the Field of Strategies: The Growing Interaction Between China’s Economy and the World Economy Through National Strategies as Represented by the BRI and the Free Trade Zone (FTZ) Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Connectivity and Interaction in the Fields of Goods and Capital: The Inception of a New Opening-Up Structure and a New System for an Open Economy, Comprising Foreign Trade, Attracting Foreign Investment, Outbound Investment, Cross-Border Capital Flow and so on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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7.1.3 Connectivity and Interaction in the Field of Prices: The Factors Influencing the Internal Value (i.e., the Prices of Goods) and External Value (i.e., the Foreign Exchange Rate) of Currencies and the Currency Pricing Mechanism Are Growing Increasingly Diverse and Complicated, and China Is Increasingly Interconnected with the International Market . . . . . . . . . . . . . 7.1.4 Connectivity and Interaction in the Field of Policies: China’s Independence in Monetary Policy Is Affected by the Uneven Recovery of the Developed Economies and the Emerging Economies, and It Is Facing Greater Difficulties in International Coordination . . . . . . . . . . . . . . . . 7.2 Pursue Opening-Up at a Higher Level . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 China Has Entered a Critical Stage of Comprehensively Improving the Level of Opening-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Approaches to Opening-Up at a Higher Level . . . . . . . . . . . . 7.2.3 Advice on Bringing China’s Opening-Up to a Higher Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Macroeconomic Control Under the New Normal . . . . . . . . . . . . . . . . . . 8.1 Definition of Macroeconomic Control . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Transformation Is Required in Nine Aspects of Macroeconomic Control Under the New Normal . . . . . . . . . . . . . . 8.2.1 Transformation of Focus from Macro Control of Domestic Economy to Using Both Domestic and International Markets, Domestic and Foreign Resources and Domestic and International Rules for Better Resource Allocation Worldwide . . . . . . . . . . . . . . . 8.2.2 Transformation from Fixation with Economic Growth Rate to Pursuit of Better Economic Quality and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 Transformation from Project Management to Formulation of Major Strategies and Plans and Policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.4 Transformation from Management of Demand Alone to Management of Both Demand and Supply . . . . . . . . . . . . . 8.2.5 Transformation of Focus from Pre-implementation Approval to Regulation and Services During and After Project Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.6 Transformation from Factor-Driven Development to Innovation-Driven Development and Higher Total Factor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.7 Transformation from Incentive Policies for Given Industries to General-Benefit Industrial Policies . . . . . . . . . .

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8.2.8 Transformation of Focus from Investment Management to Management of Both Investment and Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 8.2.9 Transformation from Short-Term Economic Stimulus Policies to Macroeconomic Control Based on Market Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 9 Policy Advice on How to Adapt to, Grasp and Steer the New Normal of Economic Development, Promote Supply-Side Structural Reform, and Foster New Economic Growth Drivers . . . . . 9.1 Background of the Supply-Side Structural Reform . . . . . . . . . . . . . . 9.2 The Supply-Side Structural Reform and the Efforts to Foster New Driving Forces for Development Should be Guided by the Five Concepts of Development, Namely Innovative, Coordinated, Green, Open and Shared Development . . . . . . . . . . . . . 9.3 The Supply-Side Structural Reform in Five Areas Is Vital to Implementation of the Five Concepts of Development . . . . . . . . . 9.3.1 We Need to Reap More Benefits of the Reform in Key Areas and Give Full Play to the Guiding Role of the Reform in These Areas in Deleveraging Financing, Reducing Costs, Guarding Against Risks, and Boosting Efficiency and Economic Growth . . . . . . . . . . . 9.3.2 We Should Implement Deeper Tax Cuts to Give Full Play to the Role of Tax Policies as a Bridge Between Demand-Side Policies and Supply-Side Reform . . . . . . . . . . 9.3.3 We Should Make More Use of Market Forces, Proactively Address Overcapacity, and Adjust and Improve Our Industrial Policies to Improve the Environment for Competition in China . . . . . . . . . . . . . . . 9.3.4 We Should Deliver Benefits by Innovation and Accelerate the Implementation of the Innovation-Driven Development Strategy to Promote Technological Progress, and Shift the Growth Driver from Input of Factors of Production to Innovation and Enhancement of Total Factor Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.5 We Should Continue to Make Full Use of China’s Demographic Dividends and Foster New Advantages in This Regard, Especially Advantages in Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Policy Suggestions for Fostering New Drivers for Growth to Ensure Sustained, Steady and Sound Development of the Macro Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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9.4.1 Properly Handling the Relationship Between the Government and the Market and Letting the Market Play a Decisive Role in Resource Allocation . . . 9.4.2 Speeding Up the Reform of the Income Distribution System, Adjusting the Income Distribution Structure, and Addressing the Widening Income Gap . . . . . . . . . . . . . . . 9.4.3 Improving the Housing Supply and Security Systems, and Defusing Risks in the Real Estate Market . . . . . . . . . . . . 9.4.4 Ensuring and Improving the People’s Living Standards, and Enhancing Their Sense of Happiness and Sense of Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.5 Building an Open Economic System, Fostering New Advantages for Participating in and Leading International Economic Cooperation and Competition . . . . . 9.4.6 Unleashing the Enormous Potential for Wealth Creation in the Private Sector and Inspiring the Vitality of Mass Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 1

Historical Significance and Features of China’s Economic New Normal

After thirty-eight years of rapid growth since introduction of the reform and openingup policy, China’s economy has entered a new development stage. This is especially true after the global financial crisis. With no more miraculous double-digit growth, China’s economic growth is slowing down. China is still facing strategic opportunities for economic development, and the overall trend in its economic growth remains unchanged. But China’s economy has entered a “new normal” characterized by slowdown in growth rate, adjustment of structure, and shift of growth engines. Understanding the new normal, adapting to the new normal and guiding the new normal are not only topics for thorough analysis and study, but more importantly, major tasks in the present and future stages of China’s economic development.

1.1 China’s Economic New Normal: Coinage of the Notion and Its Global and Domestic Context On an inspection tour in Henan province in May 2014, General Secretary Xi Jinping of the Communist Party of China (CPC) Central Committee remarked on China’s economy. He said, “China is still in an important period of strategic opportunities for development. We must boost our confidence, consider the features of China’s economic development at the current stage, and adapt to the new normal. While staying cool-headed, we must remain vigilant about various risks and take preventive measures to minimize their negative impact.” In a meeting with non-Communists on July 29th, 2014, Xi Jinping stressed again that we should have a reasonable understanding of the features of China’s economic development at the current stage, and adapt to the new normal with greater confidence. The conclusion that China’s economy has entered a new normal reveals the changes in China’s economic development. It manifests the great foresight of the CPC Central Committee and their readiness to deal with changes. © Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_1

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People’s Daily carried a series of editorials on China’s economy under the new normal on its front page for three consecutive days from August 5th to August 7th, 2014. The three editorials, titled “New Bright Spots in Economic Development”, “New Features in Economic Performance”, and “Economy Enters A New Stage of Development” respectively, analyzed China’s economy from multiple perspectives, and explained the features and significance of China’s economic new normal. The newspaper carried further reports on “staying cool-headed under the new normal” on August 4th, 11th and 18th that year under the titles of “New Features of the New Normal”, “A Dialectical Approach to the New Normal”, and “New Response to the New Normal”. These articles engendered heated discussion among the media, researchers and practitioners. The concept of “new normal” represents not only the insights of the CPC Central Committee into the landscape of China’s economy, but also the trends in macro-economic policies. It embodies the new understanding of economic growth for a long period to come of the CPC and the Chinese government. The formulation of macro-economic policies will be adapted to the objective law of the new normal. It is also a topic of major theoretical and practical significance for theoretical researchers. At the 2014 Asia–Pacific Economic Cooperation (APEC) CEO Summit on November 9th, 2014, President Xi Jinping delivered a keynote speech, “Seek Sustained Development and Fulfill the Asia–Pacific Dream”. In this speech, Xi Jinping analyzed the three characteristics of China’s economy under the new normal. First, the growth rate has shifted from high speed to medium-to-high speed. Second, the economic structure is constantly improved and upgraded. The tertiary industry and consumer demand are becoming the main driver. Urban–rural and regional disparities are narrowing. Household income is going up as a percentage of national income. The benefits of development are reaching more people. Third, the economy is increasingly driven by innovation instead of input and investment. The new normal will bring new development opportunities for China. First, under the new normal, China’s economy has still registered considerable increment albeit the slowdown. Second, under the new normal, China’s economic growth has become more stable and been driven by more diverse forces. Third, under the new normal, the Chinese economic structure has been improved and upgraded, heralding a more stable development prospect. Fourth, under the new normal, the Chinese government has vigorously streamlined administration and delegated power, further unleashing market vitality. He was also aware that the new normal was accompanied by new challenges and problems and that some potential risks were already emerging. The intensity of endeavor to comprehensively deepen reform will determine whether China will successfully adapt to the new normal. To comprehensively deepen reform, Xi Jinping required that efforts should be made to stimulate market vitality, broaden the path for innovation, advance opening-up at a higher standard, improve people’s well-being, and promote social equity and justice. The Central Economic Work Conference held from December 9th to December 11th, 2014 made an authoritative interpretation of the features of China’s economic new normal: China’s economy is evolving to a model that is more advanced, better structured, and with more intricate division of labor. China has entered the new

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normal of economic development. Its growth rate has shifted from high speed to medium-to-high speed. The development 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 capability expansion to adjusting stock while optimizing increment. Growth engines are turning from traditional areas to new ones. “We must understand China’s various economic development stages from historical and dialectical viewpoint, and have an accurate understanding of the new normal”. The Conference analyzed the trends in consumption, investment, exports and balance of payments, production capacity and industrial structure, the comparative advantages of production factors, market competition, resource and environment constraints, accumulation and defusing of economic risks, resource allocation model and means of macro-economic control. At the Conference, it was decided that China had entered a new normal of economic development. “Understanding the new normal, adapting to it, and guiding its development are the prevailing logic in the present and future stages of China’s economic development”. The annual Central Economic Work Conference analyzes China’s economic development and sets the agenda for economic work of the next year. But theoretical and philosophical approaches in such analysis had been rare before the conference in 2014. Therefore, the term “prevailing logic” attracted considerable attention. The author believes that in addition to strategic guidance in economic work, the Central Committee has also introduced logic and methodologies, with more attention to the integrity of theories and consistency of logic. Since “new normal” is a dynamic process, we shall not only understand it and adapt ourselves to it, but also guide its development. While addressing pressing issues of the present stage, we should also focus on improving the quality and the benefits of economic development. This will lay a solid foundation for mid- and long-term development and create new growth drivers. “New normal” is both the starting point in logic and the condition for us to have an accurate understanding of the current economy and carry out economic work properly.

1.1.1 The Global Economy Is Undergoing Profound Changes and Adjustment Currently, the global economy is experiencing profound adjustment after the financial crisis, with potential risks intertwined. Countries are showing divergent trends in growth, structure, economic cycle, and policies. The international situation is intricate and complex. In general, the following four features in global economic development are worth noting.

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Fig. 1.1 Global economic growth

First, major changes in South-North relations.1 The US, Japan and Europe have been recovering slowly from the recession, while the emerging economies and developing countries have experienced divergent growth and slowdown in growth rate (see Fig. 1.1). Nonetheless, the contribution to global economic growth of developed economies continues to decline, while emerging economies and developing countries have seen a rising share in global growth. The change in contribution to global growth is a manifestation of the changes in South-North relations, which has brought about further changes. With enhanced voices, developing countries are narrowing the gap between them and developed countries. As major economies show divergent economic growth, and the new technological revolution leads to breakthroughs, South-North relations, especially economic cooperation and integration, have shown some new trends. According to the IMF’s January 2016 World Economic Outlook, world economic recovery has been sluggish and uneven, while risks are particularly prominent for emerging market. Global growth was projected at 3.4% in 2016 and 3.6% in 2017, 0.2 percentage point lower than forecasts in the October 2015 World Economic Outlook, and Growth in China was expected to be 6.3% in 2016 and 6.0% in 2017. Growth in developed economies was projected to reach 2.1% in 2016 and hold steady in 2017. Growth forecasts for the US were 2.6% and 2.6% in 2016 and 2017, lower than the forecast 2.8% in the October 2015 World Economic Outlook. For Euro area, the UK and Japan, the projections were respectively 1.7%, 2.2% and 1% in 2016 and 1.7%, 2.2% and 0.3% in 2017. Growth in emerging market and developing economies were projected to slow down for the fifth consecutive year 1

Wenling Chen, “Three Major Changes in the World that Require Global Governance,” www. GMW.cn. (June 27, 2005).

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to 4.3% in 2016 and 4.7% in 2017. Growth in India was expected to be the highest and reach 7.5% in 2016 and 2017, respectively. Russian economy was projected to decline by 1.0% in 2016 and grow by 1.0% in 2017. Brazilian economy was projected to decline by 3.5% in 2016 and hold steady in 2017. Second, “new mediocre” of slow growth of global economy. The new mediocre is reflected in four areas. First, low growth. Forecasts of global growth has been declining. According to the October 2015 World Economic Outlook published by the International Monetary Fund (IMF), global growth was projected at 3.1% in 2015 and 3.6% in 2016, 0.2% lower than forecasts in July 2015. Second, low interest rates. Developed countries such as the US and some developing countries continued to adopt a moderately easy monetary policy and produced a large amount of currencies of low value. Third, low inflation. Due to shrinking demand and declining prices of commodities such as oil and iron ore, and so on, global economy faces low inflation and risks of deflation. Fourth, low employment rate. Except for China and the US, major economies, including Europe, Japan and other developed economies and some developing economies, are confronted with low employment rate. Third, major changes in order and rules. While the old institutions, mechanisms and rules still play a dominant role, new ones continue to emerge with growing influence. New institutions, mechanisms and rules have gradually become major players in global economy. Establishment of financial institutions such as Asian Infrastructure Investment Bank, New Development Bank, and SCO Development Bank have had multiple influences on global financial order and set off a chain reaction. With integration of regional economy, many countries consider it a national strategy to establish free trade zones. Examples in this regard include the TPP (Trans-Pacific Partnership), TTIP (Transatlantic Trade and Investment Partnership) and RCEP (Regional Comprehensive Economic Partnership) agreements and China’s agreements with 20 countries on establishing 12 free trade zones. The old landscape of the manufacturing industry is gradually falling apart while the global supply chain, industrial chain and value chain are reconstructing. Fourth, China’s increasing influence on Asia and the rest of the world and growing association with the world economy. China is the world’s second largest economy, the second largest trader, the holder of the largest foreign exchange reserves, and the largest developing country recipient of foreign investment. Meanwhile, it is also the third largest in terms of annual outbound investment and its currency, the renminbi, is the fourth most-used settlement currency. China’s economy remains an important engine for global growth, and will continue to have a major influence on the global economy. China’s economy and the global economy have never been more connected and interdependent, involving a wide array of complex issues. Its multiple national strategies have had significant influence on the rest of the world, and its foreign trade has been expanding. The flow and stock of foreign investment in China and China’s outbound investment keep rising. As closely linked with the global market as it now is, China’s pricing and exchange rate regime are also subject to the influence of more factors. And the country’s macroeconomic policies have to be more reactionary as opposed to proactive than it has ever been. China’s economy has decisive influence on the world economy. What all of this means is that when drawing up China’s domestic

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reform and development plans and global political and economic engagement strategies the country must not be treated as if it was separate from the rest of the world. We must be aware of the global impact of our policies, and how we communicate and coordinate them. China must make use of domestic and international markets and resources and abide by domestic and international rules. It will play a more active role in global governance and make efforts to improve the global governance system and ability.

1.1.2 Economic Globalization and Regional Economic Integration Are Gathering Pace Negotiations led by the US for regional free trade agreements are accelerating. In recent years, the US made great efforts to promote and advance new free trade partnership such as the TPP, TTIP, and TISA (Trade in Services Agreement). The US is making an accelerated effort to promote the TPP and TTIP in the Atlantic and Pacific regions, which, obviously, will have a major influence on global political and economic landscape. Its impacts on emerging economies including China are not to be underestimated. The 12 TPP countries achieved a basic agreement after twenty years of negotiation, giving rise to a mega economic circle that accounts for 40% of world economy. The US played a leading role in TPP negotiations since it joined the negotiation. The US considered the TPP a central strategy of the American Pivot to Asia, and aimed to make it a twenty-first century platinum-standard trademark agreement. Through the TPP, the US hoped to intervene in economic integration in the Asia–Pacific region and satisfy its geopolitical, economic and security needs. It expected to reshape and dominate the Asia–Pacific regional economic integration and dilute the influences of China, Japan and other countries, so as to maintain its global hegemony. The first round of TTIP negotiations was launched in June 2013, and the second round took place in Brussels from November 11th to 15th, 2013. Negotiations were held in relation to service, investment, energy and raw material and so on. The main topic was to coordinate regulation and reduce trade barriers. If the US achieve its goals, an Asia–Pacific free trade zone and US-EU free trade zone will be established. It will lead to major changes in the global trade landscape and severe challenges for China’s open economy. Considering the economies and trade volume involved, the TPP and TTIP will have great influences: they will boost the trade and exports of the US and Europe, and decrease the trade and exports of countries outside the Asia–Pacific and US-EU free trade zones. More importantly, US-led regional free trade agreements have several negative influences. First, the WTO may be rendered useless. The Doha round of WTO negotiations, launched in 2001, have reached deadlock. Any breakthrough in the TPP and TTIP negotiations may put the WTO in a disadvantageous position: The WTO may have to adjust its rules and standards in accordance with those of the TPP and TTIP. Second, the APEC can be rendered useless. Once the TPP takes effect, the

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APEC’s member economies will split in two: TPP members and non-TPP members. Considering the non-binding nature of the commitment of APEC members, APEC’s influence on regional cooperation will diminish, while doubts arise concerning its necessity. Third, it will disturb the regional cooperation in Asia mainly in the form of “10 + X” (ASEAN plus other countries). With Japan and some ASEAN countries joining the TPP, the necessity of 10 + 3 (ASEAN Plus Three) and 10 + 6 (ASEAN Plus Six) has further decreased. Under such circumstances, negotiations for regional cooperation in Asia may come to a standstill. Fourth, China faces risks of being marginalized. The TTIP and TPP negotiations involve nearly all major trading partners of China. That’s to say, major economies except for China and BRICS countries will become part of the free trade zones established according to the TPP and TTIP agreements, if achieved. China, in that case, will be in a very disadvantageous position. Some Chinese are contented with the dividend of reform and opening-up thanks to entry into the WTO and the progress in economic development. They have little knowledge of, and even deny, the new standards and development of free trade in the rest of the world. Opening-up and construction of an open economy are lacking in strategic vision and breakthroughs. A few fields have experienced stagnation and even retrogression. In the process of globalization, every country, either developed or developing ones, shall adopt an opening-up strategy and participate in the globalization while safeguarding its national interest. A win–win situation can only be created by cooperation in globalization if we stay open-minded in understanding of global resources, demands and talent.

1.1.3 The Third Industrial Revolution Is Well Underway Starting from the twenty-first century, a new round of technological and industrial revolution has been well underway. Global scientific and technological innovation shows new trends and features, such as interdisciplinarity, new disciplines, and extending frontiers. Breakthroughs are seen or expected in basic research fields like structure of matter, evolution of the universe, origin of life, essence of consciousness and so on. The extensive use of information technology, biotechnology, new materials and new energy promotes the massive technological revolution in nearly all fields featuring greenness, smartness and ubiquity. Jeremy Rifkin, an American expert on economic trend, is the author of The Third Industrial Revolution: How Lateral Power is Transforming Energy, the Economy and the World. In it Rifkin argues that the Third Industrial Revolution will bring about fundamental changes in the way people live and work. The Economist also published several articles on the prospects of the Third Industrial Revolution. In the US, in fact, the Third Industrial Revolution, featuring big data, smart manufacturing, and wireless revolution, can already be felt. People are increasingly aware that, across the world, a great technological revolution is in the making, which would very likely result in a new round of industrial revolution. In the fifty years to come, the centralized

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business operations of the First and Second Industrial Revolutions will be replaced by the distributed business practices of the Third Industrial Revolution. History shows that the Industrial Revolutions play a decisive role in economic development. It is possible that the Third Industrial Revolution will lead to fundamental changes in the global allocation of technologies and market, industrial relocation, and new global economic landscape. In the Third Industrial Revolution, many labor-intensive industries will disappear, while emerging industries like robot, renewable energy, new materials, smart manufacturing, nanotech, bioelectronics, and so on, will gradually take a dominant role. According to the International Federation of Robotics, the robot revolution will create a market of trillions of US dollars. The integration of robot technology with new information technologies like big data, cloud computing, mobile internet and so on is gathering pace. 3D printing and artificial intelligence are developing rapidly. Software and hardware technologies for robotics are maturing, resulting in lower cost and better performance. Military drones, self-driving cars, and household robots have hit the market. Some autonomous robots can learn like human beings. Robots are claimed by some as the jewel in the crown of the manufacturing industry, as the development, manufacturing, and use of robots are measure of the scientific innovation and high-end manufacturing. Main robot manufacturers and countries have intensified their efforts to seek the commanding heights in technology and market. China is expected to be the biggest market of robots. But currently, China does not have the necessary technology and manufacturing capabilities to secure an advantageous position in such competition. Without a solid scientific foundation, China is still weak in independent innovation. It is still vulnerable to other countries due to lack of core technologies in key fields. To hold the initiative in competition and development, China must develop its own core technologies. Core technologies are the fundamental guarantees of economic security, national defense and other major interests. More importantly, if a country fails to take a leading position in core technologies of major industries in the Third Industrial Revolution, it will ultimately lose its competitive edge in conventional industry. In the context of the Third Industrial Revolution, the US has proposed the reindustrialization strategy. Independent innovation and accelerated economic transformation are inevitable prerequisites to improving international competitiveness and gaining the initiative in global economic competition.

1.1.4 Foreign Demand Is Recovering Slowly, and Trade Protectionism Is Rising In the five years after the global financial crisis, the financial and monetary policies of related countries introduced some financial and monetary policies that alleviated the crisis. But they failed to boost the weak demand in major economies. In 2012,

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the total value of imported goods and services in the US increased by 3% and 2% respectively from a year earlier. In the same year, the EU saw 2% decrease in the value of imported goods and 3% decrease in the value of imported services. In Japan, the growth rates for the value of imported goods and services in 2012 were 4% and 2% respectively year-on-year. Obviously, these countries and regions had weaker demand for imports than in 2011. Slow recovery of global demand has led to global overcapacity. With tight fiscal policies and deleveraging, developed economies experienced sluggish growth for a long period, which weakened demand including demand for imports. In the past two years, the growth rate of US imports was lower than the growth of its domestic demand. For the EU, the proportion of imports from other economies remained unchanged and even fell last year. Due to slow recovery of foreign demand, China’s trade growth began to fall. In 2014, China’s exports and imports increased by 2.3% to 26.4 trillion yuan, including exports of 14.4 trillion yuan, up by 4.9%, and imports of 12.04 trillion yuan, down by 0.6%. In 2015, China’s imports and exports decreased by 7% to 24.58 trillion yuan, including exports of 14.1357 trillion yuan, down by 1.8%, and imports of 10.4492 trillion yuan, down by 13.2%. Meanwhile, trade protectionism is on the rise. Reflection on economic globalization and free trade after the global financial crisis catalyzed the rising trade protectionism. Countries took trade protection measures for alleviation of domestic conflicts and pressure. According to incomplete statistics of the Ministry of Commerce of the People’s Republic of China (MOFCOM), in 2012, China’s exported goods were subject to seventy-two trade remedy investigations, more than the investigations in 2011 and involving higher value. More and more such investigations are initiated by developed economies such as the US, the EU, and Canada. In addition to agricultural products and low value-added industrial products, high value-added products are also subject to investigations. China’s outbound investment is also hindered by protectionism. Investment and acquisition of state-owned and private Chinese companies in other countries are often impeded, especially in Europe and the US. Chinese companies like Huawei, ZTE and Sany were rejected by some countries, because they were believed to constitute national security threats.

1.1.5 China’s Economy Is at a Complex Stage of Shifting the Economic Growth Rate, Restructuring the Economy, and Addressing the Impact of Previous Stimulus Policies China’s economy is now at an intricate and complex stage of shifting the economic growth rate, restructuring the economy and addressing the impact of previous stimulus policies. World economy is also undergoing profound adjustments. So, China is facing increasingly complex domestic and international situations in economic

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development. Such situations are reflected in changes of some major economic indicators. According to traditional statistics and analytical methods, some of the economic indicators are not consistent. There are some examples in this regard. The economic growth is slowing down, but urban employment remains stable. The electricity consumption in the industrial sector is growing slowly and railway freight volumes is decreasing slightly, but the industrial sector retains a high growth rate. The growth of government revenue is slowing down at a faster pace than economic growth. Money and credit supplies are growing at a relatively faster pace, and aggregate financing is growing rapidly, but economic growth has been slowing down. Such inconsistencies between economic indicators may seem confusing, but it is a natural result of the unprecedented challenges confronting Chinese economy. Shifting economic growth rate accords with economic laws. China’s economy has maintained a high-speed annual growth rate of approximately 10% in the over thirty years since reform and opening-up. As China’s economic aggregate continues to grow, the human and natural resources for economic development and factors such as political institutions and economic policies are changing. Analysis in terms of the structure of production factors such as labor force, capital, technological progress and the structure of the primary, secondary and tertiary industries show that the slowdown of China’s economic growth is an inevitable stage in the development of real economy. Under the impact of such internal factors and the global financial crisis, China’s economic growth rate has been slowing down in recent years. In view of the sluggish global economic growth and the ongoing economic restructuring, China’s shift of growth rate is in line with economic laws. China has chosen to confront the growing pains of economic restructuring in order to accelerate the transformation of its economic development model. With the persistence of smog in several Chinese cities since late 2012, people have realized the growing conflicts between environment, resources and economic development and the urgency for China to expedite the transformation of its economic development model and adjust its economic structure. The mismatch between China’s financial and economic data has its roots in structural problems, too. In view of the slowdown in China’s economic growth, the lasting effects of the global financial crisis, and the positive results seen by other countries in navigating the crisis through faster economic restructuring, China has a stronger sense of urgency to push ahead with economic restructuring using the market mechanism. Though structural adjustment is made at a price. To cut overcapacity and upgrade industrial structure, some industries in China are inevitably hit, and some firms may even go out of business. Such growing pains are unavoidable in structural adjustment. Through economic restructuring, the US has gained the initiative in development of emerging industries and regained a leading position in global economy with its high-tech industries such as big data, biotechnology, and shale gas. Economic restructuring enabled the moderate recovery of the US economy. China is now at a crucial stage of economic transformation and upgrade. Economic restructuring is the trend of the times, and we must carry it through. The growing pains of economic restructuring are necessary preparations for future development.

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Addressing the impact of previous stimulus policies is absolutely necessary to resolving the deep-lying problems that have accumulated during the years. China was seriously impacted by the global financial crisis in 2008. To mitigate the negative effects of slump in economic growth, Chinese government adopted stimulus policies to stimulate domestic demand and revitalize industries and so on, contributing to China’s economic upturn. The stimulus policies worked from 2009 to 2010, resulting in high economic growth rate up to 11.9%. Chinese economy was the first to come out of the shadow of the financial crisis. Since the second quarter of 2011, China’s economic growth has been slowing down. Now, China is addressing the impact of previous stimulus policies. At this stage, though the stimulus policies are gradually phasing out, the accumulative and spillover effects of these policies continue to have a profound influence on economic structure. Such effects also restrict the choice of macro control policies and the space for macro regulation.

1.1.6 The Service Industry Has Become an Important Source of Impetus for Economic Development The service industry is now the primary sector in world economy, contributing to approximately 70% of the total. The service industry accounted for 74% of GDP in high-income countries and 50% in low-income countries. Since the beginning of the twenty-first century, service industry has been developing rapidly in major countries and regions. From 2000 to 2010, the contribution of services’ value added in GDP rose from 73.5 to 80% in the US, from 66.8 to 74% in Japan, from 67.3 to 71.2% in Germany, from 64.3 to 67.4% in Brazil, from 48.2 to 55% in India, and from 33.2 to 43.2% in China. The service industry also dominates foreign direct investment. In early 1970s, service industry attracted a quarter of the global FDI stock. But now it has become a major FDI sector, with its share of FDI stock increased from 48.9% in 1990 to 62.2% in 2006, according to statistics of the UNCTAD. From 1980 to 2012, global service exports increased by nearly twelve times from US$367.3 billion to US$4,345 billion, accounting for 19% of the global exports of goods and services. Services are superior to manufacturing in added value, energy consumption, pollution and job creation. The development of service industry is considered a major measure of a country or region’s overall strength and international competitiveness. Service industry has become an important driver of strong, balanced and sustainable economic growth. In China, the service industry is a new growth area with considerable space for development. According to the statistical communique in 2013 issued by the State Bureau of Statistics of China, the value added of the service industry accounted for 46.1% of the GDP, 1.5 percentage points higher than the previous year, and 2.2 percentage points higher than that of the manufacturing industry. It was the first time that the service industry accounted for a larger share than the manufacturing industry. In 2015, the tertiary industry accounted for 50.5% of the country’s GDP,

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ten percentage points higher than the secondary industry. China also has great potential in service trade. From 2007 to 2013, China’s trade volume in services surged from over US$200 billion to over US$500 million. In 2013, China’s total imports and exports of services amounted to US$539.64 billion, registering a year-on-year growth rate of 14.7%, nearly twice the growth rate of goods imports and exports in the same year. The share of trade in services in China’s foreign trade kept increasing, reaching 11.5% in 2013. In the same period, China’s contribution to global services trade was up from 3.8% in 2007 to 5.53% in 2012, ranking third in the world. In 2013, China’s total services export reached US$210.59, up by 10.6% year-on-year, registering a growth rate six percentage points higher than in 2012. Its contribution to global services exports also increased from 3.6% in 2007 to 4.4% in 2012. As income and capital stock keep growing, China is undergoing the transition from an economy driven by investment and export to a consumption-driven one. The transition will boost the demand for service industries, especially for producer services. Meanwhile, the Chinese government will make greater efforts on industrial restructuring, in which the priorities in policy making are to address overcapacity in the industrial sector and inadequate supply in the service industry. The service industry is gathering pace and contributing more to economic growth. This is a product of accelerating consumption upgrade in China, and the achievement of industrial restructuring policies. With urbanization speeding up in China, the consumption of goods will keep decreasing, while the consumption of services will keep rising. Thanks to consumption upgrade and promotion of service-oriented manufacturing, the contribution of the tertiary industry in GDP will further climb. China is transforming from a global factory to a global market, with its economy transforming from mainly driven by the manufacturing industry to driven by both the tertiary industry and the manufacturing industry.

1.2 Main Features of China’s Economy Under the New Normal It is not surprising that the world economy has entered a “new mediocre” and the Chinese economy has entered the new normal after the global financial crisis. Due to ongoing profound adjustment of the world economy and increasingly pressing demand for economic restructuring in China, the previous dividends of development are decreasing and even vanishing, while new driving forces have not taken shape. Looking at the present and the future, I believe that China’s economic development has entered a new normal featuring shift of growth rate, structural upgrade, and innovation-driven development. First, economic growth is slowing down, and the job market will continue to shrink. With development of China’s economy and the shift of its growth model, China is no longer seeing double-digit growth. Instead, it has shifted the annual growth rate to a medium-to-high speed of 6–8%. This is inevitable for middle-income

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economies, so, we shall stay calm. Meanwhile, considering the jobs needed for college graduates which account for about half of the new members of the labor force, frictional unemployment and structural unemployment will persist. Second, structural upgrade continues despite temporary pains. China’s economy is undergoing and will continue to have comprehensive and profound changes. The service industry, especially productive services, is gathering pace. The industrial structure is upgrading. The gaps among regions are narrowing. A pattern of balanced and coordinated development between regions is taking shape. The nominal growth rate of resident’s income will surpass that of enterprise’s profits and government revenue. The income gap between rural and urban residents will narrow. Consumption and non-governmental investment take a bigger share in the demand structure and gradually become the main driving force of economic growth. Though, structural adjustment and upgrade cause temporary pains, such as overcapacity, risk exposure and so on. Third, China’s economy is undergoing a transition from input- and investmentdriven economy to an innovation-driven economy. Facing the challenges caused by profound adjustment of the world economy and the opportunities arising from the new round of technological and industrial revolution, China is improving the quality and effect of development. As China vigorously promotes advances in science and technology, innovation will become the fundamental driving force of its economic development, restructuring and upgrade. It is foreseeable that in the new normal, China’s economic development will present new features and problems. The following seven areas are worth in-depth studies. First, regional economic development through interaction and coordination between China and international community under the new normal. The proposal and implementation of strategies including the Silk Road Economic Belt and the 21st Century Maritime Silk Road, coordinated development of Beijing, Tianjin and Hebei, the Yangtze River Economic Belt, the China (Shanghai) Pilot Free Trade Zone and so on has enriched the theories and practices of regional economic development and open economy. Such strategies are aimed at interaction and coordination between China and the rest of the world. They are implemented across the country, including inland, coastal and border regions, and promoted in other countries as well. The underlying principle is to cross administrative divisions and even national borders to promote coordination between regions in China and coordination between China and other countries through interaction between China and the international community and balanced development between regions. Regional economic cooperation between cities, provinces and even countries will broaden the scope for flow and combination of the factors of production. Second, fluctuations in prices under the new normal. Undoubtedly, a major challenge for China in economic development is slowdown in growth rate and intensifying structural deflation which has lasted for fifty months in the industrial sector. In the medium and long term, multiple factors lead to price rises. Domestic factors include slowly growing labor cost, price reform of resource products, previous money supply,

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accelerating urbanization, ecological protection and management and so on. International factors are mainly the aftermath of the global flood of liquidity and the moderate recovery of major developed economies. Third, challenges and priorities in structural reform under the new normal. China is confronted with obstacles and risks in some areas of reform. On top of that, the slowdown in growth rate, temporary pains of economic restructuring and the need to address the impact of previous stimulus policies have posed huge challenges. Accordingly, it is crucial to make coordinated efforts to accelerate reform while maintaining steady growth. In our efforts to further reform, we shall consider the impact of each reform task on the macroeconomy, and coordinate and prioritize the various tasks. Expansionary policies shall have priority over contractionary policies to minimize the negative impact of reform on the macroeconomy in the short term. Fourth, opening-up under the new normal. China is now making great efforts to tackle various challenges. Greater openness brings new drivers for growth, which is conducive to accelerating reform and building an open economy in China. With a great space for opening-up, China will continue to benefit from opening-up the dividend of which is a major driving force for economic reform and restructuring. Fifth, hidden and explicit risks brought by the new normal. The traditional manufacturing industry is mostly confronted with overcapacity and difficulties in operation. Due to rapid expansion of loans from regional financing platforms and shadow banking, credit risks keep rising, leading to severe liquidity mismatch and difficulties for enterprises in accessing affordable financing. Without long-term mechanisms for conducting regulation over the real estate market, it remains unclear if risks on the real estate market can be mitigated and if the excessive inventory can be cleared. China’s economic growth has long been impeded by the changing international economic environment and policies, international capital market fluctuations, growing protectionism, and barriers to outbound investment. Since China’s economy entered the new normal in 2015, reform tasks have been lagging behind, while downward pressure on the economy was on the rise. People are also concerned about exposure to potential risks such as volatility of China’s capital market and its aftermath, risks of international capital reversal, intensifying global financial turbulence, and the necessity to coordinate policies if the US decides to raise interest rates, risk of being excluded from the TPP, and risk of short- and medium-term sluggish trading on the global commodities market. The risks also create uncertainty in economy. Sixth, assessment of sustainable development under the new normal centered on and guided by development of ecological civilization and green development. Sustainable development “meets the needs of the present without compromising the ability of future generations to meet their own needs”. So, guided by the overall goal of ecological civilization, we should stick to green development as the fundamental path to ecological civilization and sustainable development. This includes promotion of green production models, green consumption patterns and green mindset. Along the path of development with Chinese characteristics, we should incorporate the concepts and measures relating to ecological development into efforts for political, economic, social and cultural progress. We will make coordinated efforts to promote new industrialization, urbanization, informationization, agricultural modernization

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and green development. We will optimize the optimize the framework of territorial space development and accelerate technological innovation and restructuring for conservation and efficient use of resources. We will put more efforts into key areas including ecological and environmental protection for major breakthroughs in crucial areas and key links. Ecological progress will improve people’s life and present an image of environmentally friendly China. Seventh, change and innovation in ideas and methods for macro control of economy under the new normal. The macro control shall focus on the median line and aim to keep the economic growth within a reasonable range. Early warning systems shall be established for economic growth, unemployment rate and inflation to detect overheating or recession in the economy. The growth target, adjusted annually, shall be considered as the median line rather than the baseline. As long as the economy is performing within a reasonable range, we should stick to our policies and maintain our strategic confidence. We should be more tolerant of slowdown in economic growth and shall not short-term stimulus policies because of temporary economic fluctuations. Macro control focusing on the median line results in clearer expectations of market players, more flexible range of economic growth, and greater initiative and flexibility in macro control.

1.3 Historical Significance of the New Normal in China’s Economic Development China’s economic development has entered a new stage featuring economic transformation and upgrade. We must guarantee the long-term economic development even at the cost of lowered growth rate. We must abandon our fixation with GDP, and put the quality of development and sustainable development first. By transition from factordriven development to innovation-driven development, we shall make great efforts to develop a growth model with high value-added products and good quality of development, which facilitates parallel growth of household income and GDP growth. The historical significance of the new stage of China’s economic development lies with the following fundamental transformations.

1.3.1 Transformation of the Economic System: Decisive Role of Market in Resource Allocation A major task in the new stage is reform of the economic system. China’s economic system has undergone two major changes. The first transition, from a mixed economy combining government control and market economy to a planned economy, took place in the early days of the People’s Republic of China. The second transition, from a planned economy to a socialist market economy, was after introduction of the

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reform and opening-up policy. Both transitions had a significant impact on China’s economy. The Third Plenary Session of the Eighteenth CPC Central Committee decided to deepen economic reform by centering on the decisive role of the market in allocation of resources and to promote more efficient, equal and sustainable economic growth. It was a minor amendment from a basic role to a decisive role of the market, but it introduced a brand-new idea concerning the significance of the market. Despite development of China’s socialist market economy over the past two decades or so, it still has ailments that restrict the vitality of market entities and prevent the market and the law of value from full play. If these ailments are not addressed, it would be difficult to improve the socialist market economy, and to push forward with transition of growth model and economic restructuring. So, China must remain committed to the direction of socialist market economy, promote market-oriented reforms, and reduce direct allocation of resources controlled by the government and government’s intervention on microeconomic activities. We will speed up the building of a unified and open market system with orderly competition, and develop equal, open and transparent market rules. The government must refrain from overreaching itself and allow market mechanisms to be fully effective in any area where it is expected to play a role. We aim at maximum effect and optimum efficiency in resource allocation, which will stimulate the vitality of businesses and individuals and allow them a great space in economic activities and wealth creation. The core issue in reform of the economic system is properly handling the relationship between the government and the market, enabling market to play the decisive role in resource allocation while letting the government perform its functions better. The concept of making the market play a decisive role in resource allocation represents a new breakthrough in CPC’s understanding of the laws that underlie the development of socialism with Chinese characteristics and a new achievement in adapting Marxism to China’s conditions. It also marks the beginning of a new stage in development of the socialist market economy. To guarantee the decisive role of the market in resource allocation while giving a better play to the government’s role, we must have a proper understanding of the relationship between the market and the government. Both have advantages and limitations. Only when market and government give full play to their comparative advantages can China achieve economic upgrading. The government must improve the top-level planning and institution to ensure the equal status of different forms of ownership in legitimate use of production factors and participation in market competition. The governments of all levels shall accelerate the transformation of their functions and shift their focus from direct organization of resource allocation, taking measures to attract investment and project implementation. The government’s main responsibilities include social administration and public services, providing public goods, improving the environment, ensuring the transparency and fairness of laws and regulations, policies and efficiency in law enforcement for businesses, offering living allowances to residents, reducing the barriers to entry and transaction cost of various entities. The market shall be allowed to play a better role in resource allocation and revealing efficient economic organizations to stimulate the vitality of various entities. The market also

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serves as a platform of group study through which the related entities learn through trial and error, discover and create new opportunities. The key to reform of the economic system is improving the socialist market economy. The past three decades since the introduction of the reform and openingup policy show that to achieve sustained economic growth, we must improve the socialist market economy to stimulate the vitality of market entities. In 1992, the Fourteenth National Congress of the CPC stipulated that China’s economic reform aimed at establishing a socialist market economy, setting a clear goal for the reform. In 1993, the Third Plenary Session of the Fourteenth CPC Central Committee issued the Decision of the CPC Central Committee on Issues Concerning Establishing Socialist Market Economy, making a master plan for development of the socialist market economy. China’s achievement in economic reform is closely related to toplevel planning at the two conferences. Over the past two decades, China’s socialist market economy has been in continuous improvement and contributed significantly to its economic development. Still, it needs further improvement. In reform of the economic system, we should pay attention to top-level planning, and facilitate and encourage businesses to enter the market and emerging industries by reducing preimplementation approval and barriers to entry in industries. The government shall accelerate the new reform of institutions and specify its roles in economic activities through legislation to ensure the stability of the market economy. Great efforts shall be made in crucial areas and key links such as land tenure, household registration and so on. We shall gradually separate household registration from resident welfare so that it can perform its original function. We must deepen the land administration reform by establishing market for transfer of collectively owned rural land to release huge potential in domestic demand arising from urbanization. In improvement of the legal system, we should establish an equal and fair market through punishment for violators of the socialist market economy.

1.3.2 Transformation of Driving Forces for Economic Development: New Drivers for Development At the new stage of economic development, China attaches much importance to transition of driving forces for development. We shall change the traditional driving forces for economic development and foster new drivers from reform, domestic demand, opening-up and coordinated development between regions. First, create new reform dividends. We shall deepen reform by measures like free trade zones and replacement of business tax with VAT to energize market entities and boost internal driving forces for economic growth. Second, release the potential in domestic demand. Firmly maintaining the strategic focus of boosting domestic demand, we should accelerate making reasonable and effective income doubling plans, promote the new type of urbanization, improve public services and social security including education, health care, housing and so

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on, and establish a long-term mechanism for increasing consumer demand. By so doing, the resident’s potential in consumption and the potential in demand arising from urbanization will be released and form an internal driving force for economic development. Third, promote development through opening-up. We shall pursue a more proactive strategy of opening-up and establish pilot free trade zones in more areas. We will speed up opening to the west and the north, participate in negotiations on new free trade agreements such as the TPP, Trade in Services Agreement and so on, and push for an early conclusion of the Regional Comprehensive Economic Partnership (RCEP) and building of the Free Trade Area of the Asia–Pacific (FTAAP). These measures will facilitate the development of an open economy and enable further progress in reform, fostering a new driving force for economic development. Fourth, promote coordinated development between regions. We must explore the potential in imbalanced development between regions and give fully to the comparative advantages of various regions. Priorities shall be given to development of the Bohai Rim, the middle reaches of the Yangtze River, the Huaihe River basin, the central and western regions, and traditional industrial bases in the northeast. We shall make vigorous efforts to develop city clusters like Beijing-Tianjin-Hebei cluster, Chengdu-Chongqing cluster and so on to foster new growth points. To boost rural economy, narrow the gap between urban and rural areas and pursue common prosperity, we shall speed up improving mechanisms and institutions for the integrated development of urban and rural areas, especially in planning, infrastructure, public services and so on.

1.3.3 Transformation of the Economic Development Model: Innovation-Driven Development China also attaches great importance to the transition of its economic development model. By shifting the development model, China is transforming from overreliance on factors of production and investment to development driven by innovation. In development of the new model, we shall boost productivity with technological progress, improve the contribution of technological advance to economic development and foster world-renowned enterprises and brands. First, pursue innovation-driven development. We should carry out major national science and technology projects to remove major technological bottlenecks and provide technological support for innovation of enterprises. We should establish a market-oriented system for technological innovation in which enterprises play a leading role and enterprises, universities, and research institutes work together. We should improve our research and ability to apply research results to production. We should accelerate the research, development and application of new technologies, products and production processes. We should improve the mechanisms relating to innovation, especially the mechanisms for rewarding, cooperation and support and

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risk sharing. Measures shall be taken to encourage flow of innovative talents to businesses and organization of strategic technological alliances so that enterprises can draw on each other’s strengths in innovation. We will establish an equity investment system with venture capital at its core and support technological innovation with financial innovation. Second, create new demographic dividend. We will deepen educational reform, provide well-rounded education for all students and improve vocational educational and skills training. We shall accelerate the development of skilled workers and hightech professionals and give full play to the role of the talented individuals as the key human resource. We should improve the contribution of total-factor productivity and technological innovation to economic growth and raise the value of goods and services by improving the quality of the workforce and the productivity. Third, move up the industrial chain. We will strengthen supply management and develop innovation market on the basis of goods market to encourage innovation and gain first mover advantages in emerging industries of strategic importance. We will promote producer services and guide the manufacturing industry to move up the industrial chain. We will increase the effective supply of goods and services to stimulate consumer demand. Fourth, foster world-renowned enterprises and brands. To this end, mid- and long-term plans shall be made. We will choose some backbone enterprises enjoying certain fame, competitive advantages and potential and support them in their efforts to go global. We will encourage technological integration and innovation of business models to facilitate the flow of innovative resources to excellent businesses.

1.3.4 Transformation of the Goal of Economic Development: People-Oriented Development At the new stage of economic development, we should set a new goal of economic development. To this end, we should abandon the fixation with GDP, and set upper and lower limits for growth rate. We must put the people first, and do our best to address the most practical problems of the greatest and most direct concern to the people, including education, employment, social security and so on. We need to make progress in areas such as employment, people’s income, public services, environmental protection and resource conservation, promote social equity and justice, and significantly improve the people’s lives. We must make sure that the fruits of development are shared by the people. We should take actions in the following aspects. First, create more jobs. China should adopt a more proactive employment policy. While improving the human resources market, China encourages employment through multiple channels and in multiple forms, including starting businesses. The service system for employment shall be improved. Great efforts shall be made to promote the service industry and increase its contribution to economic growth, which

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will create more and better jobs and lead to continual improvement of employment rate and quality. Second, increase people’s income. China will deepen reform of the income distribution system, and take measures to ensure increase of individual income in step with economic development and wages and salaries in tandem with improvement in labor productivity. It will also raise the share of individual income in the distribution of national income and increase the share of wages and salaries in primary distribution. By so doing, China aims to double its 2010 per capita income in rural and urban areas by 2020. Third, create a favorable ecological environment. China will advance the revolution of energy production and consumption, and support the development of energyefficient and low-carbon industries, and new energy and renewable energy. China will make greater efforts to save energy, reduce its consumption and set a limit on total energy consumption. China should deepen reform of prices, taxes and fees for resource products, and establish systems for paying for resource consumption and eco-compensation-systems that can reflect market supply and demand and resource scarcity, recognize ecological values and requires compensation in the interests of future generations. China should improve the system of accountability for ecological and environmental protection and the system of compensation for environmental damage. China is pursuing green development that will enable the people to enjoy clean air and water and safe food. Fourth, ensure equal access to basic public services. We should conduct comprehensive reform to ensure equal access to basic public services, including fairness in education and balanced allocation of educational resources. We should improve the universal medical insurance system, establish a mechanism to provide insurance and aid in treatment of major and very serious diseases, and integrate the basic old-age insurance system and the basic medical insurance system for urban and rural residents. We should improve the social welfare system, and establish a housing system combining market-based allocation and the housing security system of the government. We should take continuous efforts to establish systems of public services and social security compatible with the level of economic development, and accelerate efforts to narrow the gaps between regions and between groups of people.

Chapter 2

New Normal: Slower Growth

Considering its growing size and growth model transformation, China’s economy is not expected to maintain double-digit growth rate. Instead, it will likely shift gear to medium-to-high speed growth rate of six to eight percent annually. This is inevitable for middle-income economies, so, we shall “stay cool-headed”. Meanwhile, the growth rate of the working population will decrease. Considering the great number of jobs needed for college graduates which account for about half of the new working population, frictional unemployment and structural unemployment will persist. Therefore, the most prominent feature of China’s economy under the new normal is the persistence of economic slowdown and shrinking job market.

2.1 China’s Economic Slowdown from Mediumand Long-Term Perspective 2.1.1 China’s Economic Development Since 1978 Let’s first have a review of China’s economic performance during the over 30 years since reform and opening-up began. China’s GDP growth has had ups and downs during the past three decades since reform and opening-up (see Fig. 2.1). The fluctuation shows that China’s economy has gone through three and a half cycles of downturn and upturn. There is a half cycle because the GDP growth rate has been dropping since it peaked in 2007. First, 1978 to 1984. During this period, the GDP growth rate reached the peak value of 11.6% in 1978, and dropped to the lowest of 5.1% in 1981. The growth rate decreased by 6.5% points in three years and then rose by 10.1% points for three years.

© Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_2

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Fig. 2.1 China’s GDP growth rate since 1978

Second, 1984–1992. The growth rate peaked at 15.2% in 1984 and reached the lowest of 3.9% in 1990. The downward trend lasted for six years, in which the growth rate was down by 11.3% points. The upturn trend lasted for two years when the growth rate was up by 10.4% points. During this period, China’s GDP growth rate rose and dropped sharply, registering record increase and decrease. It showed that China’s economy was not stable at that time. Third, 1992–2007. The growth rate peaked at 14.3% in 1992 and reached the lowest of 7.6% in 1999. The downward trend lasted for seven years, in which the growth rate was down by 6.7% points. The upward trend lasted for eight years when the growth rate was up by 6.6% points. This cycle, covering fifteen years, is the longest so far. The downward and upward trend, however, was much more moderate, showing that China’s economy was growing stable. Fourth, 2007–2015. The cycle started eight years ago and reached the peak 14.2% in 2007, although it seems that it has not hit the bottom. China’s growth rate stood at 7.4% in 2014, and decreased to 6.9% in 2015. The downward trend, the most prolonged in the four cycles, has lasted for eight years. It resulted in a decrease in growth rate of 7.2% points, a bit smaller than the most significant drop in the second cycle. This round of drop is comparatively moderate drop, but the most prolonged. As the downward trend continued, China’s growth rate in 2015 declined to 6.9%, the lowest since 1991. As shown in this cycle, China’s economy is in a period of transition towards the new normal, while its growth rate is shifting down a gear from high-speed to medium-to-high speed.

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2.1.2 Driving Forces for China’s High-Speed Economic Growth from 1978 to 2007 From 1978 to 2007, the 30 years since the introduction of reform and opening-up policy, China’s economy grew rapidly at an average annual rate of nearly 10%. It is mainly enabled by the following five driving forces.

2.1.2.1

Enormous Demographic Dividends of Growing Working-Age Population and Changes in Demographic Structure

Over the past three decades, thanks to strict family planning policies, the proportion of working age population (people aged fifteen to sixty-four) to the total population in China has been on the rise. Greater share of working age population led to lower dependency ratio and increasing workforce, thus facilitating economic growth (see Fig. 2.2). Meanwhile, a substantial number of rural residents moved to coastal areas in the east and joined the workforce of the high-productivity manufacturing industry. Due to significant gap between living standards of rural and urban residents, the arrival of such new workforce in cities brought down the average wage in urban areas. China thus had the comparative advantage of low labor cost in development of the manufacturing industry. China became a member of the WTO in 2001. Since then, it made full use of its low labor cost and the global market and became the world’s factory by rapidly developing export-oriented economy. Profound changes in population and demographic structure helped accelerate China’s industrialization.

Fig. 2.2 Proportion of the working age population, total dependency ratio and GDP growth rate in China

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They are a major driving force for China’s miraculous economic growth during the past thirty years.

2.1.2.2

Rapid Human Capital Accumulation Arising from High Household Expenditure on Education

China’s economy and society underwent rapid and profound changes in the past three decades. Forces that had long been suppressed were always on the lookout for opportunities. Social mobility was greater than prior to 1978, and each individual had the opportunity and possibility to achieve upward mobility. Therefore, the middleand low-income groups spent a considerable part of their income on offspring’s education. Admission to university, either in rural or urban areas, could mean upward movement of an ordinary young people from the grass-root level to the middle and upper class. It might even change the destinies of the whole family and make them permanent urban residents. It is what we call in economics a high potential rate of return on investment in human capital. In such a context, the human capital accumulation began to gather pace, which facilitated the rapid economic development of China. Besides, Chinese people value education and hold high hopes for their offspring. Such long-standing tradition and genes in Chinese culture also contribute to the phenomenon.

2.1.2.3

Rapid Physical Capital Accumulation Arising from Huge Market Demands and High Investment Rate

China’s economic growth in the past thirty years was driven by investment. As a result of enormous market demands, the rate of return on investment and savings rate were both high (see Fig. 2.3), leading to rapid growth of fixed-asset investment and accumulation of physical capital in China. The reform and opening-up has unleashed the productive forces, and created massive demands. Thanks to the mutual reinforcement of productive forces and demands, investment in fixed assets have remained profitable. In addition, as the first three decades since introduction of the reform and opening-up policy in China coincided with the golden age of global economy after World War II, the great external demands also contributed to China’s rapid economic growth. The fast accumulation of physical capital in China was also attributable to low financing cost for enterprises. If we are to explain it according to economics, it is because that increasing workforce necessarily leads to larger proportion of net savers and smaller proportion of net consumers, which in turn result in rising savings rate of households, enterprises and government. The high savings rate can support the high investment rate, thus controlling the rise of financing cost.

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Fig. 2.3 Savings rate, investment rate and GDP growth rate

2.1.2.4

Rapid Technological Progress and Improvement of Total-Factor Productivity Enabled by Latecomer Advantage

When reform and opening-up was launched, China lagged behind developed countries in technology. It has developed and upgraded its own technologies through improvement of imported ones. In general, China has benefitted significantly from obvious latecomer advantage and made rapid progress in technology. China’s rapid technological advancement, as well as major innovation in institutions, enabled the fast growth of its total-factor productivity in the past thirty years, which improved the efficiency of resource allocation and facilitated rapid economic growth.

2.1.2.5

Enormous Dividends of Institutions Unleashed from Major Reforms and Innovation of Institutions as Represented by Reform and Opening-Up

China’s reform and opening-up is an unprecedented initiative. It’s a major adjustment to production relations and the superstructure. Through reform of the economic system, it aims to unlock and develop productive forces, creates new driving forces, and unleash people’s initiative and creativity to create wealth. The Chinese government introduced a range of policies and measures, including the household contract responsibility system in rural areas, decentralization and interest concession in urban areas, development of socialist market economy, accession to the WTO, and the decision to deepen reforms in an all-round approach at the Third Plenary Session of the Eighteenth CPC Central Committee. The efforts were aimed at eliminating barriers to development of productive forces in production relations and the superstructure.

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China has successfully transformed from a centrally planned economy to socialist market economy and unleashed enormous energy in its economic reform. Through reform and opening-up, China has grasped the valuable strategic opportunities after World War II and developed a multi-levelled modern market system that is unified, competitive, open and in good order. Reforms are conducted in planning, investment, fiscal and taxation, financial, and judicial systems and SOEs in a planned and progressive manner, and advanced in the fields of science and technology, education, rural areas, institutions and administrative management system. Now China has developed a system and framework of opening-up adapted to economic globalization, and completed the transformation from an isolated economy to an open economy. Reform and opening-up create a sound external environment for China’s accelerated development in a period of strategic opportunities, stimulating the momentum and vitality of economic and social development.

2.2 Causes and Nature of China’s Economic Slowdown Since 2008 The international and domestic economic and financial situations have been increasingly complicated since 2008, showing new features, problems and trends. In China, it is evident that its economic growth rate will continue to drop in the medium and long term. China is facing unprecedented intricacies in the downturn. The downward pressure is partly due to short-term cyclical adjustments and the downward trend in the medium and long run. But fundamentally, it is also a result of structural and institutional problems and constraint of resources and environment. In summary, the current economic slowdown in China is caused by multiple factors.

2.2.1 Direct Cause of China’s Declining Growth Rate: Cyclical Adjustments Concerning cyclical adjustments in the short term, a major factor resulting in the declining potential growth rate is China’s contractionary policies after the RMB four trillion stimulus package in the wake of the global financial crisis. Investment in infrastructure and real estate, parts of domestic demand, has obviously slowed down as a result of the government’s adjustments. Investment in the manufacturing industry also continues to decline due to enormous pressure of overcapacity, resulting in rapid decline in fixed-asset investment. With stimulus policies like “Home Appliances Going to the Countryside”, the contribution of consumption to GDP growth once hit 62.7%. But the stimulus effect didn’t last long, and now the contribution of consumption to GDP growth has dropped to around 50%. Major developed economies are unable to maintain debt-based economy after the global financial crisis in 2008, and

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Fig. 2.4 Contribution of demands in three major areas to GDP growth since 2008

will continue deleveraging in a long period in sluggish growth and sometimes recession. As a result, emerging economies are also slowing down in economic growth, facing greater financial risks. The shrinking foreign demand due to sluggish global economy has had a significant impact on China’s economy. The globalization dividend, from which China has benefited, is diminishing. The global trade is rebalanced at an accelerated pace. Withdrawal of foreign direct investment in China has started. The shrinking foreign market aggravates the weak demand in the short term. In such a context, China cannot maintain sustainable economic growth through traditional reliance on export. Moreover, it is difficult to achieve growth through export-driven development. The contribution of net exports to GDP growth in China has been less than 2% over the past years (see Fig. 2.4). Considering downward trend in the medium and long term, changes are happening to China’s economy, which are characteristic of his stage: the potential growth rate is slowing down from the double-digit high speed to medium-to-high speed of six to eight percent. It shows that traditional driving forces of economic growth are waning, which leads to declining potential growth in the medium and long term.

2.2.2 Fundamental Cause of China’s Declining Growth Rate: Structural Problems In addition to the cyclical factors as mentioned above, there are other deep-lying causes of China’s declining growth rate since 2008. Cyclical factors and structural problems have both played a role. To be accurate, structural problems, or problems on the supply side, has been the dominant cause of the slowdown (Fig. 2.5). According to classical and new classical economics, growth in factor inputs, including labor, capital, and land, is the driving force for economic growth. Joseph

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Fig. 2.5 Savings rate and investment rate since 2008

Alois Schumpeter, Robert Lucas, Jr. and some other economists consider innovation, technological progress and other factors as part of the supply side in economic growth. They analyze economy from the perspective of the supply side, i.e., factors driving economic growth including input of labor and capital, technological innovation, institutional reform and so on, in conjunction with prices, employment, investment, and other factors. Following this approach, as the traditional driving force for economic growth has been diminishing, the economic growth is inevitably slowing down, and the potential growth rate is declining. Before new growth poles are fostered and a new round of technological revolution is started, declining potential output and growth are to a great extent inevitable for the following reasons. First, from the perspective of industrial structure, the efficiency in resource allocation has been dropping. Given that a number of industries suffer from severe overcapacity, the market is saturated after rapid expansion of the manufacturing industry. It has become the prevailing trend to transfer factors of production from the manufacturing industry to the service industry and to raise the share of the latter. In theory, the average productivity of the service industry is inferior to that of the manufacturing industry. This is especially the case in China because its service industry consists primarily of low-end services. In such case, if productivity of the service industry is not improved significantly, transfer and flow of labor force from the manufacturing industry to the service industry will lead to lower productivity. As the transfer of labor force is accelerated, economic growth rate begins to drop. This is inevitable unless high-end services, with higher productivity than the manufacturing industry, are developed. The proportion of the service industry surpassed that of the manufacturing industry in 2013, showing that China’s economy has reached maturity, during which stage economic slowdown is inevitable. Second, concerning the structure of factors of production, the efficiency of factor supply has been dropping. With decreasing working age population, China is facing shrinking labor force. The Lewisian turning point is approaching at a faster pace,

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and the traditional demographic dividends are waning. Absolute decrease in China’s working age population (aged fifteen to sixty-four) started in 2014 (see Figs. 2.6, 2.7, 2.8 and 2.9), with a decrease of 1.43 million in working age population from 2013. In another word, China started losing its demographic dividends in 2014. In 2015, China’s working age population (aged fifteen to sixty-four) dropped to 988 million, accounting for 71.9% of the total population. The proportion of working age population in China has been declining for five consecutive years. The declining proportion of working age population shows that the supply and demand of labor in China has changed. It is no longer feasible to pursue high-speed economic growth relying on traditional demographic dividends. The worsening demographic structure lowers the savings rate, raises the domestic labor cost, and lowers the housing price, thus undermining the potential growth rate. Thankfully, along with the changing demographic structure, the quality of the population is also improving. The government is also making accelerated efforts to adjust its demographic policies. The changing demographic structure impacts economic growth slowly in a long period, so, it will not cause dramatic decrease in the potential growth rate. Meanwhile, savings rate and investment rate are declining, so is the supply of capital. Resident’s savings are the source of capital. As a result of changes in population size and demographic structure, China is facing aging problem earlier than it has expected. The dependency ratio is expected to rise significantly, which will undoubtedly lead to further decrease in savings rate. Statistics show an obvious downward trend in China’s savings rate which dropped from the record high of 51.8% in 2010 to 47.96% in 2014 (see Fig. 2.5). Lower savings rate leads to less capital available for investment and lower potential growth rate, thus resulting in decrease in growth rate. In a word, due to falling growth rate of labor and capital inputs and lack of sufficient technical progress, slowdown in economic growth is inevitable.

Fig. 2.6 China’s demographic structure since 2008

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Fig. 2.7 Working age population and gross savings rate since 2008

Fig. 2.8 History and development trend of China’s demographic structure

As a result of the above structural changes, China is now developing towards a new growth pattern. With no more growth at the rate of nearly 10%, China’s economic growth has entered a new stage of low- to medium-speed. It has entered a new normal of economic slowdown.

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Fig. 2.9 China is losing its comparative advantage in working age population

2.2.3 Economic Growth in the Medium and Long Term Is Hindered by Slow Pace of System Reforms The economic slowdown in China is inevitable at the current stage of development, and suits the national conditions. But more importantly, it is a product of the serious flaws in China’s economic system. A great driving force for China’s rapid economic growth over the past three decades is its constant institutional innovation. Regrettably, there has been no significant structural reform in the past ten years or so. As a result, its institutional innovation has slowed down and economic growth is losing momentum. If no major structural reform is introduced, China’s economy may face a hard landing. We have analyzed the problems with various systems in China leading to potential decrease in growth rate. It shows that the increasing downward pressure on economy is not caused by a single problem, but a product of multiple flaws of the systems. In addition to deep-rooted problems with systems and institutions and structural problems, the current economic development in China is unbalanced, uncoordinated and unsustainable, which makes the situation even more complicated. Much is to be done to complete the long-term and arduous tasks of maintaining stable growth, adjust economic structure, accelerate reform and so on. To address the major issue of the falling potential growth rate for the current and future stages, it is crucial to have an accurate understanding of the deep-lying problems with systems and how they undermine the economy. We need to find the key links and make targeted efforts. We have analyzed China’s strategic planning, especially top-level design, and some crucial areas and key links of economic and social development. This includes income distribution, the fiscal and taxation systems, the financial system, resources and environment, social securities, state-owned enterprises (SOEs), transformation of government functions, opening-up and so on. We have either found a large number of deep-seated problems with these systems and institutions, or that they cannot keep up with the development.

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First, strategic planning and top-level design are hindered by institutional obstacles. As a major country, China does not have sufficient intellectual support. Institutions have been established to perform top-level design relating to cross-department coordination and tenure of officials, but their strategic planning and top-level design ability is yet to be improved. So far, they have not adapted to China’s needs in transition from a major economy to an economic power. Second, primary distribution of national income is unreasonable. Resident’s expenditure on housing, health care and education is excessively high. Distribution of factors and wages and salaries is suboptimal as well. There are no adequate measures to combat monopoly or preferential policies for low-income population and small enterprises. Rent-seeking and corruption are rampant. The personal income tax fails to adjust the income distribution in both directions. Third, reform of the fiscal and taxation systems is lagging behind and has lots problems. An effective mechanism is yet to be developed for separation and balance of powers relating to budget preparing, execution, and review, and fiscal power and expenditure responsibilities are not appropriately distributed between central and local governments. and reform in this regard has not made any material progress. Government expenditure is primarily spent in the economic field. The taxation system and the tax structure are not reasonable. Fourth, reform of the financial system is lagging behind. With high thresholds for financial market access, the bank industry in China is still monopolized by stateowned banks. A framework of regulation supported by market-oriented and pricebased monetary policy has not taken shape. The exchange rate and interest rate regimes are rigid. Financial regulation, especially regulation of mixed operation, is inadequate. The existing regulation system consists of the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission, each responsible for regulation of an industry. Flaws of the financial regulation system have caused some major issues, including the unprecedented stock market crash in mid-2015. Fifth, there are no well-developed price-setting mechanisms of resources and factors of production. The market of resources and factors of production is underdeveloped, the unreasonable price relations of which fail to reflect the demand and supply, scarcity of resources and factors, damage to the environment, and public tolerance. The efforts to improve allocation efficiency of resources and factors of production are making slow progress. Sixth, micro entities are hindered by obstacles in systems and institutions in innovation and development. State-owned enterprises remain administrative, bureaucratic and hierarchical, with no effective incentive and restraint mechanisms. The non-public sector of the economy is hindered by obstacles in systems and institutions. Seventh, mechanisms and institutions of social security are underdeveloped. The existing social security only covers limited population, and there is a wide gap between urban and rural areas, groups and regions. Social security does not receive much fund from government, and adopts a single, non-sustainable funding model. The government suffers from insufficient ability to provide social security and public services.

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Eighth, the transformation of government functions is behind schedule. Further clarification is required as to the role of government and market. Governments of all levels tend to overstep its bound or fail to play its role. Performance assessment of officials is mainly based on GDP, which leads to distorted understanding of job performance and inappropriate administration. There is no sound mechanism for administrative decision-making or supervision. Ninth, development of the new institutions of the open economy is behind schedule. Unreasonable trade policy engenders imbalance in trade and excessive foreign exchange reserves. Enterprises are under too many constraints during the process of “going global”. Inadequate participation of China in global governance restricts its international development space.

2.2.4 The Downturn in Growth Rate of Total-Factor Productivity Caused by Insufficient Innovation Capacity Has Negative Impact on Economic Growth Labor input, capital formation and technological progress are three factors driving the development of real economy. China’s miraculous development in the past decades is enabled by rising input of labor and capital and continuous technological development. But now the supply efficiency of these three factors is decreasing. With less labor and capital input, an important means to economic growth is to improve totalfactor productivity to counteract the impact of slowing growth of factor inputs. Generally, when total-factor productivity growth through factor mobility is slowing down, technological innovation and progress are required to promote economic growth. The problem is, China is also experiencing slowdown in technological progress and does not have sufficient innovation capacity. Therefore, the total-factor productivity in China has begun to step down. China has benefited from strong latecomer advantage in technology over the past a little more than thirty years. Through reinvention of imported technology, the totalfactor productivity was significantly improved, which boosted China’s economic growth. But now it is losing the advantage. One reason is that it is increasingly difficult to improve total-factor productivity. With continuous improvement of technology in China, its gap with advanced technologies in the world is narrowing, and the spillover effect of technology import is diminishing. Meanwhile, as China has become the world’s second largest economy, other countries no longer turn a blind eye to infringement of intellectual property rights. Therefore, China is facing growing difficulties if it wants to acquire overseas advanced technologies at low costs. China is inferior to developed economies in technological innovation. Due to many factors, China can no longer pursue innovation through import or imitation. Transformation is necessary in the supply of technological factor. The Third Industrial Revolution is now under way across the world. It features digitalization, servitization, customization, networking, and so on. These cutting-edge technologies are mostly

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controlled by developed economies. As a whole, China lags behind in technological innovation. Therefore, technological innovation and pursuit of innovation-driven development are currently the top priorities in China’s economic development.

2.2.5 Rising Resource and Environment Constraints Lead to Negative Externalities on Economic Growth Since reform and opening-up, in addition to labor and capital input, enormous investment of land, energy and other factors has also contributed significantly to the rapid economic growth in China. Though, over the past decades, China’s economic growth has been achieved at the cost of energy, resources and environment. With consumption of land, energy minerals, water resources and ecological resources, the resources and environment constraints keep rising. The persistent smog in China is an indication that the pressure on environment is approaching an extreme. Consequently, economic growth is subject to ever-tighter resources and environmental constraints. In recent years, China has been confronted with increasing resources and environmental constraints in its pursuit of economic development. With a huge consumption of resources, China’s degree of dependence on foreign resources such as crude oil and iron ore was above 50%. The escalating pollution issue leads to increasing pressure on environment. As China declares war against pollution, the extensive growth model, subject to tight constraints, has been proved unsustainable. The traditional extensive model for economic development in China can no longer endure, so, we must pursue a different approach. All these changes have led to China’s declining economic growth rate and its decision to shift down the gear of economic growth from high speed to medium-to-high speed. Low costs of land play an important role in local government’s efforts to attract investment. The consumption of land for construction in urban areas has multiplied, while the supply of marginal increment for land is greatly depleted. Statistics show that the land used for construction in urban areas in 2014 was six times as much as the size in 1978 in China. As the strictest protection of farmland becomes a new normal, the supply of land, an important factor of production, will undoubtedly be impacted. The hard constraints of energy and other resources are still rising. As the energy consumption in China remains faster than production, China is experiencing increasing import of resources and growing dependence on foreign resources, which has obviously constrained its economic growth. The environmental constraints is another huge concern for China’s economy. Environmental pollution issues such as smog, pollution of drinking water, heavy metal accumulation and so on have been hard constraints on production. It is highly necessary to include environmental pollution as an important element into the traditional production function analysis. Environmental pollution is a negative element leading to decreasing productivity and potential economic growth rate.

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In summary, among the factors leading to declining economic growth rate, we cannot underestimate the negative externalities of the growing resources and environmental constraints and shrinking supply of resources on economic growth.

2.2.6 China’s Economy Is Growing at Slower Pace But with Higher Quality Based on the above analysis of short-, medium- and long-term factors with influences on China’s economic growth, it is evident that China’s economic slowdown at the current stage and for some time to come is a natural outcome of the laws of economics. Moderate adjustments are conducive to sustainable and steady growth of China’s economy. Under the new normal, China has shifted down the gear of economic growth from high speed to medium-to-high speed, but its economy is not stagnant. Its new growth model is distinct from traditional ones, but it is in line with the laws of economics. China is leading the world with its sustainable, high-quality economic growth which is not inflated. First, the slowdown follows the laws of economics. Development of countries over the past century shows that a general trend in economic development in modern times is transition from high-speed growth to steady growth at medium-to-high speed. This inevitable shift follows the law of economics. In view of the significant changes in China’s demographic structure, rising labor cost and declining savings rate and investment rate, it is inevitable that the country’s potential growth rate is dropping. Over the past three decades, China has experienced a longer span of continuous growth at a rate higher than other countries. Its economic slowdown is a natural outcome of economic development and embodiment of the law of economics. Though, considering China’s enormous economic output, even with the moderation in economic growth, its increment is still impressive. In 2015, for example, China’s year-onyear GDP growth rate stood at 6.9%, representing an increment of approximately RMB4,079.8 billion. Second, China is leading the world in economic growth. According to a research1 which analyzed 125 economies in the Conference Board Total Economy Database, thirty-six of these economies have reached 10,000 international dollars in GDP at purchasing power parity (PPP) per capita and recorded high growth rates over 3.5%. In thirty-four of such economies, or 94.4% of them, significant slowdown (referring to a drop in average growth rate for seven years by two percentage points and above) was observed after growth at a high rate. The analysis shows that it is common for economies to experience apparent slowdown in growth rate after rapid growth for some time. By contrast, China’s economy has been growing at an annual rate of nearly 10% for over three decades. In addition, major research organizations agree

1

Li Song, Xuegong Sun, Xueyan Liu and Shigang Li, “China’s Economic Growth Rate to Maintain at 7 Percent in 13th Five-Year Plan Period,” China Economic Times, January 8th, 2015.

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that China’s economy will continue to grow at a rate of more than 5% for ten to twenty years to come. Apparently, China is still leading the world in economic growth. Third, China’s economic growth is sustainable and of high quality, rather than inflated growth. During the transition to the new normal, we should pursue highquality growth with benefits at medium-to-high speed, and shifting our focus from size expansion to quality improvement. China’s growth rate used to be inflated. If the slowdown is the result of eliminating the discrepancies between real and inflated growth, there is no reason to be scared of the growth moderation. We aim to achieve economic growth that is not inflated at a rate that ensures improvement of both quality and benefits. The economic slowdown will present new pressure, driving forces and opportunities for China in its endeavor to transform the economic development model. Taking advantage of the opportunities, China will be able to shift its economy to a track of growth that follows the laws of economics, while focusing on quality, benefits and sustainability. The tangible economic growth will better improve the wellbeing of the people, and lay a solid foundation for China’s sustainable and steady economic development in the medium and long term. In short, after rapid development for over thirty years, China has seen an end to economic development driven by low costs. In the short term, its driving forces for economic growth is weakening. In the long run, the economic downward trend is rising, and a new growth cycle has not appeared. The downward pressure on China’s economy will persist, as its economic growth rate has not yet hit bottom. In the short term, Chinese government is confronted with various problems posing dilemmas. We have multiple goals to attain, including maintaining steady growth, adjusting economic structure, accelerating reform, controlling risks and improving people’s living standards. This situation has resulted in inadequate consistency and coordination in China’s macroeconomic policies, which in turn causes fluctuations in economic development. China’s economic slump has been aggravated by overlapping of policy-related fluctuations and slowdown in the cycle of economic development. Moreover, considering the persistent impact of the global financial crisis and the lack of coordination between macroeconomic policies of major economies, the international environment is not really conducive to China’s long-term steady and sound development. Under the impact of these factors, over the recent years, China has experienced the most severe difficulties and braved the most complicated situations with the utmost care since reform and opening-up. Therefore, despite the downward risks in the economy, for some time to come, China must maintain a moderate economic growth rate. This is prerequisite to China’s sustained and sound development which is essential to coping with all the issues we have been confronted with. China’s economic new normal is not equivalent to continuous fall in economic growth rate. Excessively low GDP growth rate or continuous drop in the growth rate will engender severe problems and negative impact in the following aspects. First, China’s efforts to achieve the first centenary goal, i.e., to double the 2010 GDP and per capita income of the Chinese people by 2020. To attain this goal, in view of the growth rate of 9.5, 7.7, 7.7, 7.4 and 6.9% from 2011 to 2015, China needs to maintain an annual growth rate of 6.5% during the Thirteenth Five-Year Plan period.

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Otherwise, it would be impossible to double the 2010 GDP by 2020. Moreover, China’s GDP growth rate would be on the decrease for thirteen years in a row from 2007 to 2020, which is unprecedented in the history of the People’s Republic of China. In that case, the public would be pessimistic about China’s economic growth and have negative expectations, which may severely undermine market expectations and investment of enterprises. It would also be difficult to preserve and boost the market confidence. Meanwhile, the growth rate of per capita disposable income in China dropped to 6.6% in 2015, approaching the minimum growth rate required to achieve the goal of doubling the per capita income by 2020. If this growth rate remains below 6.6% from 2016, the goal of doubling 2010 per capita income by 2020 would not be attainable. Second, China’s efforts to skip the “middle-income trap” to become a high-income country. A moderate economic growth rate is a prerequisite for China’s advance into the new stage of development. After rapid development for three decades since reform and opening-up, China has become a middle-income country. But we have not achieved modernization. In 2014, China ranked 77th in the world with per capita GDP of US$7,500, about 1/7 of the figure of the US. Considering the aggressive approach of India in recent years, we must maintain a moderately fast rate of growth. The IMF estimated in 2015 that China’s economy would grow by 6.8% in 2015 and 6.3% in 2016, while India was expected to register a growth rate of 7.5% in both 2015 and 2016. According to the estimates of the Asian Development Bank, China’s economic growth rate would be 7.2% and 7.0% in 2015 and 2016 respectively, while the Indian economy would grow by 7.8 and 8.2% in the same period. The estimates of these two international organizations show that India will overtake China in economic growth rate by an increasingly wide margin. To skip the middle-income trap and maintain long-term steady and sound economic growth for national rejuvenation and construction of a modern country that is prosperous, strong, democratic, culturally advanced and harmonious, China must maintain an economic growth rate of 6–8%. Third, social stability and employment. Employment is vital to the people’s wellbeing and social stability. For social stability, a proper growth rate is required to create enough jobs. Fast declining of economic growth rate will have immediate impact on China’s efforts to create more jobs. China’s working-age population is now shrinking. The pressure on job creation seems to be small in terms of the supply and demand of labor force. But we should bear in mind that as the demand–supply structure of labor force changes, the issue of structural unemployment will become increasingly pronounced. For some time to come, each year, China will have seven million more graduates with bachelor’s, master’s or doctoral degrees, creating considerable employment pressure. Meanwhile, an economic growth rate below 6% will have negative impact on the macro environment of enterprises and their profits. Enterprises may have difficulties with further investment and other business operation, and even make a loss, go bankrupt or go out of business. This will undoubtedly hinder job creation and undermine social stability. It will also contain the growth of people’s income and improvement of people’s livelihood. Fourth, the growth of government revenue and financial stability and security. China’s growth rate of government revenue stood at 8.6% in 2014, recording the first

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single-digit growth rate in twenty-three years since 1992. The figure further dropped to 8.0% in November 2015. If the economic growth rate continues to decline, so will the growth rate of government revenue. The slowdown in growth of government revenue will have negative impact on a lot of tasks that require government expenditures, such as economic restructuring, transition of economic development model, reforms, social programs, expansion of social security and efforts to narrow income gap. What’s worse, in case of a significant decrease in China’s economic growth rate, performance of enterprises will deteriorate, resulting in decrease in government’s tax revenue and increase in bad debts for banks. Debt risks of local governments, financial risks, operating risks of enterprises and other hidden economic risks may become apparent and change from potential risks to real threats, undermining the stability of China’s fiscal and financial systems.

2.3 Analysis of China’s Economic Outlook Though China’s economy has entered the new normal, it does not mean that China’s economic growth rate will keep declining and no longer rise. As a developing country with a vast territory and a large population, China’s economy boasts enormous resilience, potential and room for maneuver. It still has considerable scope for development. As the new normal has brought new drivers for development, China’s economy will gradually reach bottom and stabilize. Ultimately, China’s economy will achieve high-quality, moderate recovery. After high-speed growth for over three decades since reform and opening-up, China has experienced fundamental changes to the conditions favorable for size expansion and extensive growth of the economy. China is now going through a transition from high-speed growth with focus on expansion in quantity to growth at medium-to-high speed with focus on quality enhancement. In terms of both the overall development and technology, and innovation capacity, costs of factors of production and productivity, China’s economic fundamentals remain sound with great potential for growth. China is accelerating its efforts to promote new model of industrialization, urbanization, IT application, agricultural modernization and green development. As market orientation, regionalization and internationalization remain irreversible trends of the times, China enjoys great potential for growth in ten to twenty years to come. In respect of the supply side in the medium and long term, China’s economy has potential for development and space for growth at least in the following areas: First, the dividend of human resources is arising and will continue to deliver benefits. Most researchers agree that China’s working-age population (aged 15–59) declined for the first time in 2012, indicating that the Lewis turning point has arrived

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and that China’s demographic dividend is wearing off. Some researchers,2,3 however, argue that the impact of population aging has been exaggerated in some researches. They believe that the impact of aging problem is probably overstated, and that the improvement in quality of labor force will offset the negative effect of the reduction in number, thus sustaining the demographic dividend. They claim that the definition of working-age population as the people aged between fifteen and fifty-nine does not reflect the big picture with regard to the condition of China’s labor force market. Changes in demographic dividend have undeniable impact on the economy. But population aging is a slow and long process. Among others, the following factors may postpone the arrival of the Lewis turning point. With a large rural labor force, the continuous transfer of the working-age population from the agricultural sector to non-agricultural sectors still yields demographic dividend. Considering China’s low urbanization rate, it will pursue large-scale urbanization in the years to come, which prevents the replacement of demographic dividend with demographic deficit in the short term. Its reforms in demographic policies and the education system help to address the current employment problems. Meanwhile, China has introduced policies and measures to, among others, accelerate education reform and strengthen vocational training in recent years. As a result, the dividend of population quality, or the dividend of human resources, is arising and delivering benefits. Though the surplus rural workers in China has been diminishing, the overall quality of the labor force has seen considerable improvement with around seven million college graduates joining the labor force every year. Now, China has the comparative advantage of the quantity of high-caliber labor force. As a result of the mass entrepreneurship and innovation in China, China now benefits more from the quality of its labor force rather than the quantity. Second, through industrial upgrade with focus on both traditional and emerging industries, China is gathering momentum for sustainable development. To promote the development of China’s industries towards the medium–high end, catch up with the US, Japan and other developed countries in growth rate of industrial value added, and move up the global value chains in competition, China must accelerate the industrial upgrade. With implementation of the Made in China 2025 strategy, China is transforming and upgrading its traditional industries with advanced technology through large-scale investment in technological upgrading. The central task is to promote the integration of information technology with the manufacturing industry, so as to move Chinese industries to the medium and high end and restart the engine of traditional industries to boost economic growth. Looking ahead, with increasing application of high technology and information technology and multifunctionality in agriculture, modern agriculture featuring integration with modern factors such as technology and IT application has great development space. The contribution of service sector to China’s economic growth, though significantly higher than before, is much lower than the share of around 70% in developed countries, and about ten 2

Haibin Zhu, “Trend Analysis of China’s Potential Growth Rate,” China Finance, 16 (2014). Hongbin Qu, “Clearing up the Mysteries of China’s Labor Force Market I: Aging Problem is Probably Exaggerated, while Quality Enhancement can Sustain the Dividend,” July 24, 2015.

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percentage points lower than that of developing countries of the same income level. Therefore, China’s service industry also has great space for improvement. Meanwhile, according to the Guideline for Actively Promoting the “Internet Plus” Action Plan issued by the State Council, China attaches great importance to eleven key areas, i.e., entrepreneurship and innovation, modern agriculture, collaborative manufacturing, smart energy, inclusive finance, public services, logistics, e-commerce, transportation, ecological protection and artificial intelligence. The objective is to integrate the innovative achievements of the Internet industry with other sectors of the economy and society to promote technological progress, efficiency enhancement and organizational reform. We also aim to boost the creativity and productivity of the real economy, and foster a new, more inclusive model of economic and social development in which the Internet serves as the infrastructure and an innovation factor. Third, China has vast potential in non-governmental wealth creation and vitality in mass entrepreneurship. Market entities create social wealth. For a long period, governments of all levels and SOEs have been the main sources of investment in China. Now that the asset-liability ratio of these enterprises and debt ratio of local governments remain high, we must introduce changes. Thanks to policies promoting and guiding the development of the private sector of the economy, the private sector has become an important driver for sustainable and sound development of China’s economy. Private investment accounts for 60% of the total investment in tangible assets. Due to so-called “glass doors”, “swing doors” and “revolving doors” in policy implementation, private capital is denied access to certain areas. To press ahead with economic restructuring and secure sustainable development in China, we must stimulate the vitality and potential of private investment to enhance the efficiency of capital formation and allocation in general. Fourth, mass entrepreneurship serves as the internal driving force for development. Science and technology are primary productive forces. Technological progress is the fundamental driving force for economic development. Innovation plays a pivotal role in our efforts to improve productive forces and national strength, and serves as a new engine driving sustainable development. As China’s economy enters the new normal and new technological and industrial revolutions are going on throughout the world, China’s old approach of expansion in scale and production capacity cannot sustain its development. Over time, industrial upgrade from low end to medium-to-high end will play a more important role in China’s economic growth. China’s economy will be increasingly driven by innovation rather than input and investment. For such transition, we must stimulate the people’s innovation and creativity, and raise the total-factor productivity. Fifth, the relocation of industries among regions and regional industrial upgrade provides vast space for maneuver to boost regional development and economic growth in China. With great disparities between regions, the development of regions in China is unbalanced. In general, the eastern region, the central region and the western region fall into three tiers in terms of their level of development. The eastern region, which started the earliest at the fastest pace and has the best base in China, is the first to complete industrial restructuring in the country. Its per capita income

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is similar to that of high-income economies. People in the central and western regions, which are in the second and third tier respectively, largely fall into the middle-income group. Some old revolutionary base areas, areas inhabited by ethnic minorities, remote areas, impoverished areas and old industrial bases are backward in terms of overall development. Considering the disparities between per capita GDP of different regions, through industrial relocation and upgrading between regions, China has great space for economic development. Competition and cooperation between regions will endure. Compared with developed regions, the backward regions in China enjoy latecomer advantages in industrial upgrading and technological innovation. They will release enormous economic vitality while catching up with the developed regions. Currently, the backward regions are making efforts to catch up with the developed regions, and the income of rural residents has been growing at a faster pace than their urban counterparts. This trend will contribute to the national development as a driving force for sustainable economic growth. Sixth, China’s huge market points to vast potential. China is a major country with a huge market which embraces great potential. The unbalanced development and consumption between rural and urban areas and among regions and groups allows the country to unlock demand in a gradual manner. Compared with the early years of reform and opening-up, China is facing a smaller demand, but the demand is still much larger than in developed countries. There is still a lot of room for China’s per capita income to grow. Though China is the second largest economy in the world, it lags behind in GDP per capita. There is a wide gap between China and developed countries in GDP per capita. China’s leading position in economic size and backwardness in GDP per capita shows that it has a long way to go before it becomes an economic power. In further pursuit of economic growth, China still has a substantial amount of demands for medium- and long-term investment. This includes demands for infrastructure, technological innovation, new energy, elderly care, medical service and other demands arising in further urbanization. The huge demand in the Chinese market lays a solid foundation for its sustainable economic growth. Seventh, the thriving outbound investment allows China great space to develop the overseas market. According to World Investment Report 2015: Reforming International Investment Governance, foreign direct investment in China amounted to US $129 billion in 2014, up by 4% from 2013, surpassing the FDI inflows to the US. It made China the largest FDI recipient in the world. Compared with the rise in FDI inflows to China, the increase in China’s outbound investment is even remarkable. In 2014, China’s outbound investment grew significantly by 15% and reached US $116 billion, making China the third largest source of foreign investment. As China is a latecomer in outbound investment, its investment stock is much smaller than the US, Japan and other countries that have been on the list of top FDI sources. At the end of 2014, China’s outbound investment stock accounted for 7% of its GDP, while the ratio in the US stood much higher at 36%. As the world’s second largest economy, China has great potential in outbound investment. China’s outbound investment accounts for a small share of its foreign exchange reserves. At the end of 2015, China’s

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foreign exchange reserves, the world’s largest, reached US $3.33 trillion. Its accumulated outbound investment was only US $660.48 billion in 2013, ranking eleventh in the world, accounting for 16.98% of the country’s foreign exchange reserves. China’s substantial foreign exchange reserves and low stock of outbound investment point to huge space for further outward investment. Recently, China has been actively promoting the Belt and Road initiative (the BRI) which will have a positive effect on China’s outbound investment. To be specific, it will promote infrastructure development and create new paths for global industrial relocation. Amid the global enthusiasm for infrastructure construction, the BRI, which promotes infrastructure connectivity, create a new model of international cooperation. With implementation of the initiative, we anticipate new regional ecosystem and new mode of investment in industrial chains. It is foreseeable that with implementation of the BRI, China will develop a new system of open economy and stimulate export of capacity, goods and labor through capital export. The new economic system will gradually become a new driver for China’s development. The BRI is not only conducive to addressing the overcapacity in China, but also creates an amiable environment and encourages mutually beneficial and win–win cooperation. Eighth, China’s efforts to deepen reform comprehensively are bringing about benefits and playing an increasingly significant role in promoting economic growth. The third and fourth plenary sessions of the Eighteenth CPC Central Committee introduced overall plans for deepening reform comprehensively and promoting lawbased governance nationwide, marking the beginning of a new round of reform in China. Reforms are carried out in China in areas relating to economy, society, ecology, justice, and people’s livelihood to foster new vitality and impetus for national development. Among others, China has taken measures to streamline administration and delegate powers, which contributes to a better environment for enterprises and investors and further releases the productive forces. The institutional reforms in the business sector have lowered the threshold for business startups, allowed diverse entrepreneurships, and made it easier to start businesses, greatly stimulating the entrepreneurship enthusiasm of entrepreneurs and investors. In view of the above unique advantages, we believe that the impetus for economic growth will endure in China in ten to fifteen years to come. China has the potential to grow at medium-to-high rate of 6–8%. Looking ahead, the prospects for China’s economic growth are not gloomy. Its engine of economic growth has not stopped working. Its vast potential in demand, capital, labor force, technology, land, market and non-governmental wealth creation through entrepreneurship is yet to be fulfilled. Indigenous to China’s economy, such potential is the most reliable and enduring driving force that enables China’s economy to continue to grow at a fast pace. We should continue to unleash the potential and vitality of economic growth and development through institutional reform, restructuring and transformation of the economic development model. By so doing, China will experience steady and sound economic growth for another ten two twenty years and even longer period.

Chapter 3

New Normal: Structural Upgrade

To enhance China’s comprehensive economic competitiveness, a key measure is to improve and upgrade its economic structure. In a sense, economic restructuring far outweighs GDP growth target. Since the global financial crisis, China’s economic structure has gone through comprehensive and profound changes, and such changes will continue to take place. In China, the service industry, especially productive services, has been gathering pace, promoting the continuous optimization and upgrading of the country’s industrial structure. As the gaps between regions have stopped widening and started narrowing, a pattern of coordinated development between regions is taking shape. The nominal growth rate of household income will surpass that of enterprise’s profits and fiscal revenue. The income gap between rural and urban residents is expected to narrow. Consumption and non-governmental investment, taking an increasing share in the demand structure, will gradually become the main driving force of economic growth. Though, structural improvement comes with temporary problems such as overcapacity, risk exposure and so on. Such growing pains of structural adjustments are another major feature of China’s economy under the new normal besides moderation in growth. In future, we should tolerate moderate decline in economic growth rate, and attach more importance to economic structural adjustments. Meanwhile, we should guard against extremism in the process. We should not be overcautious or indecisive in economic restructuring for fear of negative impact on economic growth rate. Nor should we make undue haste, or it may lead to hard landing and undermine social stability.

© Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_3

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3 New Normal: Structural Upgrade

3.1 Imbalance in Industrial Structure and Improvement Measures: Transformation from a Country with Large Industry to a Country with Strong Industry and Service Industry Over the past three decades, China’s industrial structure has mainly been plagued by imbalanced development of the three sectors, and severely imbalanced industrial structure which cannot adapt to changing demands and lacks flexibility. The primary sector in China has a weak foundation and lacks efficiency and competitiveness. The secondary sector, which accounts for an excessively large share of the economy, is big but not strong, placing too much reliance on heavy and chemical industries. The heavy industry accounts for an excessively high proportion, but does not take a leading position due to lack of core technologies and competitiveness. Moreover, the heavy industry consumes substantial resources and energy, and causes severe damage to the environment. In a long period, the tertiary sector, which is crucial to improvement of economic efficiency, has been developing at a slow pace and accounts for a small proportion of the economy. In recent years, however, the tertiary sector in China has been gathering pace, indicating that improvement of China’s industrial structure is underway. Both research and experience show that the tertiary sector, especially the modern service industry, is an important enabling factor in transformation from extensive economic growth to intensive growth. This is attributable to two reasons. First, further division of labor and technological progress lead to great increase in interaction between enterprises in economic growth. The modern service industry, especially financial service, insurance, modern logistics, information services and other business services can significantly enhance the efficiency of each transaction while bringing down its cost. Second, development of the service industry reduces transaction costs, thus prompting the transformation of economic growth model. Moreover, considering that the service industry consumes fewer resources than other industries, its rising share in the GDP will undoubtedly lead to transformation towards intensive economic growth. Over the years, China’s governments of all levels have an obsession with GDP growth and have made substantial investment in heavy and chemical industries. As a result, China’s manufacturing industry has been developing rapidly, and the secondary sector accounts for an excessively large share. On the other hand, the modern service industry, such as medical service, education, financial service, insurance, transportation, communications and so on, has been monopolized by government or subject to excessive government control. Consequently, the service industry is hindered by insufficient effective supply, and makes up a small proportion of the economy. For a long period, the tertiary sector in China accounts for 30–40% of the GDP. In 2001, the contribution of the primary sector in China’s GDP dropped to below 15%, while the tertiary sector accounted for more than 40% for the first time. In 2012, for the first time, China’s tertiary sector accounted for a larger proportion than the secondary sector. In 2015, for the first time in history, the tertiary sector

3.1 Imbalance in Industrial Structure and Improvement Measures …

45

contributed more than 50% of China’s GDP, when the share of the primary sector as part of GDP fell to 9.0, while the secondary sector and the tertiary sector accounted for 40.5–50.5% of the GDP (see Fig. 3.1). According to the World Bank, in recent years, the value added of the tertiary sector has remained more than 70% of GDP in high-income countries, around 60% in middle-income countries and about 45% in low-income countries (see Fig. 3.2). In China, however, the share has been below 45%. In this regard, there is a gap of 20–30% points between China and developed countries such as the US, the UK,

Fig. 3.1 Shares of the three sectors as part of GDP

Fig. 3.2 Shares of the value added of the service industry in GDP of countries of different types

46

3 New Normal: Structural Upgrade

Germany and Japan, and a gap of more than 10% points between China and Brazil, India, Russia, South Korea, and the Philippines. The employment in services accounts for 60–75% of the total in developed countries, and 30–45% in developing countries on average. China not only lags far behind developed countries in employment in services, but also fails to reach the average level of developing countries. With per capita GDP of over US $7,500, China is now a middle-income country. But the contribution of the tertiary sector to its GDP in 2015 was only 50.5%, just over the average level of low-income countries, but lower than that of middle- and high-income countries. This shows that China still lags behind in development of the tertiary sector, especially modern productive services. In 2011, the employment in the tertiary sector accounted for 40.6% of the total in China. The shares of contribution of the tertiary sector to GDP and employment in the tertiary sector in China are both approximately 5% points lower than the global average, 20–30% points lower than the figure in developed countries, and 5% points lower than the figure in India. In India, the per capita GDP of which is half that of China, the tertiary sector contributed nearly 50% of its GDP. Due to excessively low proportion of the tertiary sector, China is facing increasing employment challenges. In developed countries, the employment in the tertiary sector accounts for 70–80% of the total. In China, the tertiary sector is underdeveloped and fails to play a major role in creating jobs. Based on the changing contribution of the three sectors to China’s GDP, we divide the years between 1990–2015 two phases (see Fig. 3.3). The first phase is from 1990–2000. During this period, the contribution of agriculture to China’s GDP growth plunged from 40.5% in 1990 to 4.2% in 2000. The contribution of the secondary sector, especially the industry, surged from 39.6% in 1990 to 66.3% in 1994, and dropped rapidly to 59.5% in 2000, showing a trend of

Fig. 3.3 Contribution of the three sectors to GDP growth

3.1 Imbalance in Industrial Structure and Improvement Measures …

47

fast rise followed by rapid decline. The contribution of the tertiary sector witnessed a rapid rise from 19.9% in 1990 to 36.3% in 2000. The second phase is from 2001–2015. The primary-sector contribution showed a moderate fluctuation between 3–8%. The data of the secondary sector rose and fell between 46–58%, showing a mild downward trend. The contribution of the tertiary sector showed an upward trend, rising slowly from 49.1% in 2001 to 48.9% in 2014. In 2015, the tertiary sector overtook the secondary sector in contribution to China’s GDP growth. Considering the downward trend in secondary-sector contribution and the upward trend in tertiary-sector contribution in the past decade, it is foreseeable that the contribution of the tertiary sector will continue to rise. It is evident from the above analysis that the tertiary sector in China is overtaking the secondary sector and making continuous improvements in growth rate, share as part of GDP and contribution to the GDP growth. These long-expected changes have been effected through economic restructuring, transformation and upgrading, representing a remarkable progress in China’s slow but steady economic development. China is transforming from an industry-driven economy to a service-driven economy. Such transformation will have lasting and far-reaching influence on its economic growth, employment and other work. In ten to twenty years to come, China will shift its main drivers for growth from the industry to the service industry, and even rise as a power in the service industry. China is still undergoing industrialization, but the share of industry value added in GDP has reached the peak value. Restructuring of the secondary sector is gathering pace. New industries, forms of business and products are growing rapidly. China’s economy as a whole is apparently transforming to the medium-to-high level of development. The tertiary sector has overtaken the secondary sector in shares as part of China’s GDP, indicating that China is undergoing a transformation from industry-driven development to one driven by the service industry. Meanwhile, it shows that the traditional industries have been shrinking at a faster pace. Some industries and enterprises are confronted with challenges and making adjustments. Despite temporary pains, they have taken measures to cut overcapacity, reduce inventory, deleverage and adjust structure. The restructuring have had short-term adverse effect on market demand, profits of enterprises and even employment and so on, creating greater downward pressure on China’s economy. But these are inevitable growing pains in economic restructuring and sacrifices to pave the way for sustained and sound economic development.

48

3 New Normal: Structural Upgrade

3.2 Imbalance Between Urban and Rural Areas and Between Regions and Improvement Measures: Preliminary Success in Addressing the Growing Gap and Imbalance 3.2.1 The Urban-Rural Gap Is Narrowing In general, the urban-rural dual structure is still working in China. Progress is yet to be seen in addressing the dual structure and the urban-rural divide. A wide gap remains between urban and rural residents in terms of their per capita income and access to public services such as social security and medical service. The efforts towards integrated urban and rural development have led to only slow progress. Moreover, due to restrictions on rural migrant workers seeking jobs in urban areas, the free flow of labor and other factors of production is yet to be attained. This has adverse effect on the agricultural productivity and the transfer of rural labor. The slow progress in urbanization and work to grant permanent urban residency to people who have moved from rural to urban areas have direct impact on the aggregate demand structure, resulting in inadequate aggregate demand and domestic demand, which has delayed the formation of the new development model. Though, we have noticed some progress in addressing the imbalance between urban and rural areas in development. A prominent improvement is the narrowing income gap between rural and urban residents (see Fig. 3.4). In 2015, the growth

Fig. 3.4 Cumulative year-on-year growth of per capita disposable income of rural and urban residents

3.2 Imbalance Between Urban and Rural Areas and Between Regions …

49

rate of per capita disposable income in real terms of rural residents in China was 0.9% point higher than that of their urban counterparts. In the same year, the per capita income of urban residents was 2.73 times of the rural residents, down 0.02 from the previous year. Positive changes in income distribution suggest that the share of resident’s income in income distribution has been on the rise. Meanwhile, rural resident’s income continues to grow at a faster pace than that of urban residents, and the income gap between urban and rural residents is narrowing. China has introduced reform in the income distribution system to raise the share of individual income in national income distribution and the share of wages and salaries in primary distribution. The changes we have observed are of great significance to China in accelerating reform of the income distribution system.

3.2.2 The Government Is Placing Greater Emphasis on Top-Level Design and Coordinated Regional Development Over the years, the Chinese government has taken some measures which have effectively curbed the growing trend of the gap between regions, especially between the eastern coastal region and the central and western regions. As the economy of the central and western regions in China has been growing faster than in the central region, the gap between these regions has narrowed, but it remains substantial. Economically backward areas in China are mostly areas inhabited by ethnic minority groups, old revolutionary base areas, and border areas. Such situation has adverse effect on ethnic unity and national security, and undermines the country’s stable environment for economic development. Over the years, the central and western regions have given full play to their rich resources and great market potential. They have made vigorous efforts to advance urbanization and receive industries relocated from other parts of China and other countries. These regions have placed greater emphasis on economic restructuring and innovation, which has unleashed their potential for development, improved the coordination between regional development, enabled the development of new drivers of economic growth. Economic development in the eastern region and the central and western regions of China is now better coordinated. The eastern region is playing a leading role in China’s economic restructuring, transformation and upgrading. The central and western regions have continued to leverage their latecomer advantages thanks to an array of regional development strategies. More importantly, as China and the world are undergoing profound changes, regional development receives unprecedented attention from China’s new leadership. Local governments used to concern themselves only with the development of the regions within their purview, resulting in uncoordinated, extensive development. Now, the core principle is to get rid of such old mentality and take a holistic approach. The government has paid more attention to top-level design and coordination in development, and made great efforts to optimize regional economic structure. Three major

50

3 New Normal: Structural Upgrade

regional development strategies, i.e., the BRI, the Beijing-Tianjin-Hebei coordinated development strategy, and the Yangtze River Economic Belt, are typical examples in this regard. For more information about regional coordination under the new normal, please refer to Chap. 5.

3.3 Imbalance in Income Distribution and Improvement Measures: The Gap Is Narrowing Since reform and opening-up, we have witnessed rapid development of China’s economy and great improvement of people’s lives. But we still face diverse, special problems in income distribution, such as the unfair income distribution structure, wide income gap and so on. These problems are inevitable considering our conditions. Fair income distribution is pivotal to economic restructuring and accelerated transformation of economic development model. It is also fundamental to social fairness and justice and construction of a harmonious socialist society.

3.3.1 China’s Income Distribution Overall, China’s income distribution caters to the requirement of reform. The income distribution theories and system in China are in continuous upgrading and improvement. This has motivated the labor force and facilitated China’s economic and social development. It also helps raise resident’s income and prevents egalitarianism in income distribution. But we also have some problems in income distribution.

3.3.1.1

Primary Distribution of Income

This section analyzes the shares of the corporations sector, general government sector and household sector in primary distribution of income, the share of income that goes to the household sector as wages and salaries and the growth rate of such shares. First, shares of the three sectors in primary distribution of income. From 2000– 2013, the shares of income that went to the corporations sector, general government sector and household sector in primary distribution averaged 25.49%, 14.19%, and 60.29 percent respectively. In 2013, the figures stood at 24.1, 15.2 and 60.31%. Since 2000, there has not been significant changes to the share of the general government sector in primary distribution of income, while that of the household sector has seen a decline followed by a rise, and that of corporations has climbed and then dropped (see Table 3.1 and Fig. 3.5). Second, growth rate of income that goes to the three sectors in primary distribution. The total income of primary distribution rose at an annual rate of 14.74% from

3.3 Imbalance in Income Distribution and Improvement Measures …

51

Table 3.1 Shares of three sectors in primary distribution of income from 2000–2013 Year

Total income of primary distribution (Unit: 100 million yuan)

Corporations

General government

Households

Income (Unit: % 100 million yuan)

Income (Unit: % 100 million yuan)

Income (Unit: % 100 million yuan)

2000

98,562.23

20,854.61

21.20 12,938.86

13.10

64,768.75

65.70

2001

108,683.43

25,058.89

23.10 13,791.40

12.70

69,833.14

64.20

2002

119,765.00

27,977.35

23.40 16,746.66

14.00

75,040.98

62.60

2003

135,718.82

32,882.73

24.20 18,555.08

13.70

84,281.00

62.10

2004

160,289.69

43,053.92

26.90 22,354.29

13.90

94,881.48

59.20

2005

184,575.77

49,158.46

26.60 25,977.87

14.10 109,439.44

59.30

2006

217,246.57

58,411.45

26.90 31,033.32

14.30 127,801.79

58.80

2007

268,631.05

73,806.26

27.50 39,216.97

14.60 155,607.82

57.90

2008

318,736.66

90,346.02

28.30 44,959.47

14.10 183,431.18

57.60

2009

345,046.37

94,085.19

27.30 48,010.45

13.90 202,950.73

58.80

2010

407,137.81

109,581.51

26.90 59,510.16

14.60 238,046.14

58.50

2011

479,576.13

123,600.65

25.80 72,226.44

15.00 283,749.04

59.20

2012

532,872.06

131,858.29

24.70 82,529.82

15.50 318,483.95

59.80

2013

583,196.72

140,691.81

24.10 88,745.04

15.20 353,759.88

60.31

Average

25.49%

14.19%

60.29%

Data source Wind

Fig. 3.5 Shares of three sectors in primary distribution of income from 2000–2013

52

3 New Normal: Structural Upgrade

2001–2013. In the period, the annual growth rate of income that went to the corporations sector, general government sector and household sector in primary distribution was 16.06%, 16.15%, and 14.03% respectively. The annual income growth rate of the corporations sector and the general government sector was respectively 1.32% points and 1.41% points higher than that of the total income of primary distribution respectively, while that of the household sector was 0.71% point lower. As income distribution policies in China have been favorable to government and corporations since 2001, the income growth rate of the household sector in primary distribution has been lower than that of the total income and that of the corporations sector and general government sector (see Table 3.2 and Fig. 3.6). Third, the share of wages and salaries in the total income of primary distribution (see Table 3.3). From 2000–2013, the share of wages and salaries in the total income of primary distribution and the income of household sector in primary distribution averaged 46.92% and 77.77% respectively. In 2013, wages and salaries accounted for 50% of the total income of primary distribution and 82% of the income that went to households in primary distribution. Since 2000, wages and salaries have been a major contributor of household income in primary distribution, the share of which has remained above 70% despite certain fluctuations. Its share in the total income of primary distribution, however, has been declining and then climbing. The annual growth rate of wages and salaries from 2000–2013 averaged 11.93%, 2.81% points lower than that of the total income of primary distribution (14.74%) and 2.1% points Table 3.2 Income growth rate of three sectors in primary distribution from 2001–2013 Unit: % Total income of primary distribution

Corporations

General government

Households

2001

10.27

20.16

6.59

7.82

2002

10.20

11.65

21.43

7.46

2003

13.32

17.53

10.80

12.31

2004

18.10

30.93

20.48

12.58

2005

15.15

14.18

16.21

15.34

2006

17.70

18.82

19.46

16.78

2007

23.65

26.36

26.37

21.76

2008

18.65

22.41

14.64

17.88

2009

8.25

4.14

6.79

10.64

2010

18.00

16.47

23.95

17.29

2011

17.79

12.79

21.37

19.20

2012

11.11

6.68

14.27

12.24

2013

9.44

6.70

7.53

11.08

14.74

16.06

16.15

14.03

Average

Data source Wind

3.3 Imbalance in Income Distribution and Improvement Measures …

53

Fig. 3.6 Income growth rate of three sectors in primary distribution from 2001–2013 Table 3.3 Share of wages and salaries and its growth rate Wages and salaries Growth rate (%) Share in total income Share in total income (Unit: yuan) of primary of household sector in distribution (%) primary distribution 2000

49,948.20

8.76

51

77

2001

52,351.29

4.81

48

75

2002

57,576.79

9.98

48

77

2003

64,271.53

11.63

47

76

2004

69,639.64

8.35

43

73

2005

81,888.02

17.59

44

75

2006

93,822.83

14.57

43

73

2007

109,532.27

16.74

41

70

2008

–

–

–

–

2009

170,299.71

49

84

2010

196,714.07

19.11

48

83

2011

234,310.26

12.19

49

83

2012

262,864.06

10.68

49

83

2013

290,943.50

8.76

50

82

46.92

77.77

Average Data source Wind

–

–

11.93

54

3 New Normal: Structural Upgrade

lower than that of household income in primary distribution (14.03%) in the same period. The above analysis shows that the income of household sector accounts for a small proportion of the total in primary distribution. Further, such share has been declining in recent years. As for the share of wages and salaries in household sector’s income in primary distribution, it has remained below 50% over the years.

3.3.1.2

Redistribution of Income

After primary distribution, redistribution of income is conducted, resulting in disposable income. In study of income redistribution, we mainly focus on the shares of income in three sectors, income tax, social security and welfare, and social allowances in the country’s total disposable income and their fluctuations. First, shares of disposable income of three sectors in income redistribution and the growth rate thereof. As shown in Table 3.4, the income that went to corporations, government and households in income redistribution accounted for 22.34, 17.38 and 60.28% of national disposable income on average from 2000–2013. In 2013, the Table 3.4 Shares of disposable income of three sectors in national disposable income from 2000– 2013 National disposable income (Unit: 100 million yuan)

Corporations

General government

Households

Income % (Unit: 100 million yuan)

Income % (Unit: 100 million yuan)

Income % (Unit: 100 million yuan)

2000

99,084.70

19,200.55

19.40

14,399.93

14.50

65,484.21

66.10

2001

109,386.33

22,518.27

20.60

16,431.06

15.00

70,437.00

64.40

2002

120,839.71

25,524.32

21.10

19,645.80

16.30

75,669.59

62.60

2003

137,163.05

30,011.68

21.90

22,108.80

16.10

85,042.56

62.00

2004

162,184.90

39,324.97

24.30

26,954.68

16.60

95,905.25

59.10

2005

186,530.72

44,220.56

23.70

32,468.33

17.40 109,841.84

58.90

2006

219,484.02

51,985.55

23.70

39,375.26

17.90 128,123.21

58.40

2007

271,452.26

64,948.88

23.90

51,070.74

18.80 155,432.63

57.30

2008

321,733.82

78,817.38

24.50

58,914.45

18.30 184,001.99

57.20

2009

347,208.90

82,492.39

23.80

60,961.27

17.50 203,755.25

58.70

2010

409,891.98

96,888.93

23.60

73,618.80

18.00 239,384.25

58.40

2011

481,170.75

105,568.32

21.90

90,410.22

18.80 285,192.21

59.30

2012

533,088.87

109,742.00

20.60 102,553.67

19.20 320,793.20

60.20

2013

582,656.91

115,167.56

19.80 110,375.99

18.90 357,113.36

61.30

Average Data source Wind

22.34%

17.38%

60.28%

3.3 Imbalance in Income Distribution and Improvement Measures …

55

Table 3.5 Growth rate of disposable income in three sectors from 2001–2013 National disposable income

Corporations

General government

2001

10.40

17.28

14.11

2002

10.47

13.35

19.56

7.43

2003

13.51

17.58

12.54

12.39

2004

18.24

31.03

21.92

12.77

2005

15.01

12.45

20.46

14.53

2006

17.67

17.56

21.27

16.64

2007

23.68

24.94

29.70

21.31

2008

18.52

21.35

15.36

18.38

2009

7.92

4.66

3.47

10.74

2010

18.05

17.45

20.76

17.49

2011

17.39

8.96

22.81

19.14

2012

10.79

3.95

13.43

12.48

2013

9.30

4.94

7.63

11.32

14.69

15.04

17.16

14.01

Average

Household 7.56

Data source Wind

shares were 19.8%, 18.9%, and 61.3% respectively. The share of general government’s income in income redistribution in national disposable income has been on the rise since 2000, while that of corporations has been climbing and then dropping, and that of households has first declined and then climbed. As shown in Table 3.5, China’s national disposable income registered an average annual growth rate of 14.69% from 2001–2013. In the same period, the income of corporations, general government and households in income redistribution grew at an average rate of 15.04%, 17.16%, and 14.01% respectively. Compared with the annual growth rate of national disposable income, the annual growth rate of enterprise’s income was 0.35% point higher, that of government’s income was 2.47% points higher, while that of individual income was 0.68% point lower. This is a result of China’s income redistribution policies that have been favorable to enterprises and government since 2001. Individual income in redistribution in China has been growing slower than national disposable income and the disposable income of enterprises and government. It also points to the lack of government control in income redistribution. The disposable income of household sector is mostly from primary income distribution, and redistribution has not granted individuals more income. Meanwhile, it shows that China’s economic growth has long been driven by investment of the corporations sector, while consumption has failed to play a major role in driving economic growth. Second, fluctuations of national disposable income and total income of primary distribution. As shown in Table 3.6, the national disposable income, with moderate growth, is higher than the total income of primary distribution. In income redistribution, the corporations sector transfers income to the general government sector and

702.9

1074.7

1444.2

1895.2

1955.0

2237.5

2821.2

2997.2

2162.5

2754.2

1594.6

216.8

-539.8

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

522.5

-0.09

0.04

0.33

0.68

0.63

0.94

1.05

1.03

1.06

1.18

1.06

0.90

0.65

0.53

-25524.3

-22116.3

-18032.3

-12692.6

-11592.8

-11528.6

-8857.4

-6425.9

-4937.9

-3728.9

-2871.0

-2453.0

-2540.6

-1654.1

Value added (100 million Yuan)

2000

Corporations

Value added (100 million Yuan)

Increment rate (%)

National disposable income

-18.14

-16.77

-14.59

-11.58

-12.32

-12.76

-12.00

-11.00

-10.04

-8.66

-8.73

-8.77

-10.14

-7.93

Increment rate (%)

21631.0

20023.8

18183.8

14108.6

12950.8

13955.0

11853.8

8341.9

6490.5

4600.4

3553.7

2899.1

2639.7

1461.1

Value added (100 million Yuan)

24.37

24.26

25.18

23.71

26.97

31.04

30.23

26.88

24.98

20.58

19.15

17.31

19.14

11.29

Increment rate (%)

General government

Table 3.6 National disposable income and total income of primary distribution from 2000–2013

3353.5

2309.2

1443.2

1338.1

804.5

570.8

-175.2

321.4

402.4

1023.8

761.6

628.6

603.9

715.5

Value added (100 million Yuan)

Household

0.95

0.73

0.51

0.56

0.40

0.31

-0.11

0.25

0.37

1.08

0.90

0.84

0.86

1.10

Increment rate (%)

56 3 New Normal: Structural Upgrade

3.3 Imbalance in Income Distribution and Improvement Measures …

57

household sector. Further, it shows that the proportion of net income and expenditure to national disposable income is an indication of the effect of government’s control over national disposable income. Since 2000, the difference between households’ net income and expenditure has accounted for around 1% of their total disposable income, suggesting that the disposable income of households is made up mostly of the amount in primary income distribution, and that redistributive measures by the government have had little effect on households’ total disposable income. Third, current transfer income and expenditure of the household sector in income redistribution. Through various types of transfer payments, governments transform current transfer income from corporations and the rest of the world to current transfer to households, so as to level incomes across the society and maintain social harmony and stability. For households, government’s current transfer expenditure mainly includes social security, welfare and social allowances, and current transfer income mainly includes social security payments and personal income tax revenue. Since China began to levy personal income tax in 1980, tax revenue from household income has been on the rise. Personal income tax has become an important measure for the government to adjust the household disposable income. Table 3.7 shows that the personal income tax revenue in China has been rising year by year. From 2000–2013, the annual growth rate of China’s income tax revenue averaged 22.72%. In the same period, the average annual growth rate of households’ total income in primary distribution, wages and salaries and total income in redistribution was 14.03%, 11.93%, and 14.01% respectively. The growth rate of personal income tax revenue has been far higher than that of wages and salaries, total income in primary distribution, and total income in redistribution of the household sector. Meanwhile, as shown in Table 3.7, the income tax revenue has not maintained a steady growth rate, suggesting that the government needs to improve its legislation and implementation relating to income tax. We can also infer from Table 3.7 that we haven’t given full play to the role of personal income tax in leveling disposable income of the household sector. Since 2000, more than 20% of the transfer expenditure of the household sector has been tax payment, which accounts for only 1–2% of household income in primary distribution. Tax has not had much effect on leveling the income in redistribution of income. Government regulates the total income of households in redistribution via social security, welfare and social allowances. This depends on the payment to social security and government’s revenue. According to Table 3.8, the share of social security, welfare and social allowances in the household income from transfers was an average 98.01% from 2000–2013, suggesting that these are the major sources of household income from redistribution. Meanwhile, the share of social security, welfare and social allowances in the total disposable income of households showed moderate growth from 2000–2013, but the average share was only 7.8%. This suggests that social security, welfare and social allowances are not major sources of disposable income for households. In the same period, social security, welfare and social allowances, on average, accounted for 26.71% of the total disposable income of the

58

3 New Normal: Structural Upgrade

Table 3.7 Income tax from the household sector from 2000–2013 Unit: 100 million yuan Income tax from the household sector

2000

659.6

Growth rate of income tax (%)

Share in government’s disposable income (%)

Share in government’s net transfer payments (%)

Share in current transfer expenditure of households (%)

Share in income in primary distribution of households (%)

59.46

4.58

45.15

23.38

1.02

2001

995.3

50.88

6.10

37.89

23.79

1.40

2002

1,211.8

21.76

6.17

41.80

23.60

1.61

2003

1,418.0

17.02

6.41

39.90

25.04

1.68

2004

1,737.1

22.50

6.44

37.76

24.66

1.83

2005

2,094.9

20.60

6.45

32.28

23.54

1.91

2006

2,453.7

17.13

6.23

29.41

23.58

1.92

2007

3,185.6

29.83

6.24

26.87

22.03

2.05

2008

3,722.3

16.85

6.32

26.67

25.60

2.03

2009

3,949.4

6.10

6.48

30.49

30.43

1.95

2010

4,837.3

22.48

6.57

34.29

30.35

2.03

2011

6,054.1

25.16

6.70

33.29

30.92

2.13

2012

5,820.3

-3.86

5.68

29.07

31.83

1.83

2013

6,531.5

12.22

5.92

30.20

35.18

1.85

22.72

6.16

33.93

26.71

1.80

Average Data source Wind

general government sector, and 88.65% of its expenditure on current transfers. This shows that social security, welfare and social allowances constitute a major part of government’s current transfer expenditure, but they are not main sources of spending of government’s total disposable income.

3.3.1.3

Income Gap

This section analyzes the income gap between rural and urban areas, regions, industries and social groups, which shows the distribution of income between different groups. First, urban-rural income gap. The income gap between urban and rural residents in China has been especially wide in recent years. As shown in Table 3.9, the per capita disposable income of urban residents was 2.79 times the per capita net income of rural residents in 2000 in China. The figure reached 2.9 in 2015. From 2000–2015, the per capita net income of rural residents in China grew at an annual average rate

3.3 Imbalance in Income Distribution and Improvement Measures …

59

Table 3.8 Social security, welfare and social allowances of the household sector from 2000–2013 Unit: 100 million yuan Social security and welfare

Social allowances

Share in government’s total disposable income (%)

Share in government’s current transfer expenditure (%)

Share in total disposable income of households (%)

Share in current transfer income of households (%)

2000

2,385.60

980.56

23.38

91.81

5.14

112.91

2001

2,748.00

1,160.60

23.79

91.95

5.55

83.62

2002

3,471.50

1,164.77

23.60

89.61

6.13

98.74

2003

4,016.40

1,519.85

25.04

91.37

6.51

96.40

2004

4,627.40

2,020.72

24.66

92.00

6.93

96.28

2005

5,400.80

2,241.91

23.54

91.46

6.96

90.96

2006

6,477.40

2,807.75

23.58

90.22

7.25

91.60

2007

7,887.90

3,364.60

22.03

89.73

7.24

88.05

2008

9,925.10

5,156.88

25.60

90.15

8.20

95.11

2009

12,302.60

6,246.03

30.43

90.37

9.10

100.97

2010

16,207.24

6,137.51

30.35

84.84

9.33

100.76

2011

20,363.89

7,588.85

30.92

81.76

9.80

100.35

2012

23,930.70

8,708.28

31.83

82.25

10.17

105.69

2013

28,743.93

10,090.96

35.18

83.60

10.87

110.64

26.71

88.65

7.8

98.01

Average Data source Wind

of 10.49%, 0.57% point lower than the annual average growth rate, 11.06%, of urban resident’s per capita disposable income (see Fig. 3.7). Second, income gap between regions. Evident income gap between regions has been a long-standing issue in China. The excessively wide regional income gap is partly due to historical reasons, and partly caused by new problems that have arisen in recent years. We have observed not only disparities between rural and urban areas of a region in population structure, but also income gap between rural and urban areas of different regions. As shown in Table 3.10 and Fig. 3.8, the ratio of rural resident’s per capita net income in the eastern region to that in the western region is higher than the ratio of urban resident’s per capita disposable income in the eastern region to that in the western region. As the eastern-western ratio of rural resident’s per capita net income was 2.03 in 2000 and 1.83 in 2011, the regional income gap in rural areas didn’t show any obvious widening trend. On the other hand, the easternwestern ratio of urban resident’s per capita disposable income was 1.48:1 in 2000 and 1.45:1 in 2011. The regional income gap in urban areas didn’t show any obvious

60

3 New Normal: Structural Upgrade

Table 3.9 Distribution of income of urban and rural residents from 2000–2015 Year

Per capita disposable Per capita net income Urban Rural Urban-rural income of urban of rural households households households ratio households Value (yuan)

Growth Value rate (%) (yuan)

2000

6,279.98

2,253.40

1.95

2001

6,859.58

2002

7,702.80

9.23

2,366.40

12.29

2,475.60

2003

8,472.20

9.99

2,622.20

5.92

2004

9,421.61

11.21

2,936.40

11.98

2005

10,493.03

11.37

3,254.90

10.85

2006

11,759.45

12.07

3,587.00

2007

13,785.81

17.23

4,140.40

2008

15,780.76

14.47

4,760.60

2009

17,174.65

8.83

2010

19,109.44

11.27

2011

21,809.78

2012 2013

Engel coefficient (%)

39.40

49.10

2.79

5.01

38.20

47.70

2.90

4.61

37.70

46.20

3.11

37.10

45.60

3.23

37.70

47.20

3.21

36.70

45.50

3.22

10.20

35.80

43.00

3.28

15.43

36.30

43.10

3.33

14.98

37.90

43.70

3.31

5,153.20

8.25

36.50

41.00

3.33

5,919.00

14.86

35.70

41.10

3.23

14.13

6,977.30

17.88

36.30

40.40

3.13

24,564.72

12.63

7,916.58

13.46

36.23

39.33

3.10

26,955.10

9.73

8,895.90

12.37

35.00

37.70

3.03

2014

29,381.00

9.00

9,892.00

11.20

–

–

2.97

2015

31,195.00

6.17

10,772.00

8.90

–

–

2.90

10.49

–

–

–

Average

7.28

Growth Engel rate (%) coefficient (%)

11.06

–

Data source Wind

Fig. 3.7 Distribution of income of urban and rural residents from 2000–2015

3.3 Imbalance in Income Distribution and Improvement Measures …

61

Table 3.10 Income by region Year

Eastern region

Central region

Western region

Maximum-minimum ratio

Urban

Rural

Urban

Rural

Urban

Rural

Urban

Rural

2003

10,366

4,160

7,011

2,240

7,917

2,046

1.48

2.03

2004

11,523

4,565

7,799

2,566

8,817

2,283

1.48

2.00

2005

13,375

4,720

8,809

2,956

8,783

2,378

1.52

1.98

2006

14,967

5,188

9,902

3,283

9,728

2,588

1.54

2.00

2007

16,974

5,855

11,634

3,844

11,309

3,028

1.50

1.93

2008

19,203

6,598

13,226

4,453

12,971

3,518

1.48

1.88

2009

20,953

7,156

14,367

4,793

14,213

3,816

1.47

1.88

2010

23,273

8,143

15,962

5,510

15,806

4,418

1.47

1.84

2011

26,406

9,585

18,323

6,530

18,159

5,247

1.45

1.83

Data source Wind

Fig. 3.8 Personal income gap between regions

narrowing trend. Comparing the income in the eastern region with the central and western regions, we observe a widening income gap. Since the eastern region enjoys unique, absolute advantage, the central and western regions face great difficulties to overtake the east. Third, income gap between industries. As shown in Table 3.11, every industry has witnessed a remarkable growth of the average wage, but the growth rate varies greatly among industries (see Fig. 3.9). In the three decades since the start of reform and opening-up, the wage gap between high-income industries such as the power, information, science and technology, financial and other industries and low-income industries such as agriculture, forestry, animal husbandry, fishery, manufacturing and construction has been widening. The industry-wise highest income was four times the lowest from 2003–2010, showing that the relative gap was not narrowing. The gap

17,098 13,969

National average wage

16,185

Public health, social securities and social welfare 15,355

14,189

Education

Public administration and social organizations

12,665

Personal service and other services

Culture, sports and entertainment

11,774

Water conservancy, environment and public utility management

17,085

Real estate 17,020

20,780

Financial

20,442

11,198

Hotel and catering

Scientific research, technical service and geological prospecting

10,894

Wholesale and retail

Leasing and business services

15,753 30,897

Data transmission, computer service and software

11,328

Construction

Transportation, storage and postal services

12,671 18,574

13,627

Mining

Production and supply of electricity, gas and water

6,884

Agriculture, forestry, animal husbandry and fishery

Manufacturing

2003

Year

Unit: yuan

Table 3.11 Average wage in different industries

15,920

17,372

20,522

18,386

16,085

13,680

12,884

23,351

18,723

18,467

24,299

12,618

13,012

33,449

18,071

12,578

21,543

14,251

16,774

7,497

2004

18,200

20,234

22,670

20,808

18,259

15,747

14,322

27,155

21,233

20,253

29,229

13,876

15,256

38,799

20,911

14,112

24,750

15,934

20,449

8,207

2005

20,856

22,546

25,847

23,590

20,918

18,030

15,630

31,644

24,510

22,238

35,495

15,236

17,796

43,435

24,111

16,164

28,424

18,225

24,125

9,269

2006

24,721

27,731

30,430

27,892

25,908

20,370

18,383

38,432

27,807

26,085

44,011

17,046

21,074

47,700

27,903

18,482

33,470

21,144

28,185

10,847

2007

28,898

32,296

34,158

32,185

29,831

22,858

21,103

45,512

32,915

30,118

53,897

19,321

25,818

54,906

32,041

21,223

38,515

24,404

34,233

12,560

2008

32,244

35,326

37,755

35,662

34,543

25,172

23,159

50,143

35,494

32,242

60,398

20,860

29,139

58,154

35,315

24,161

41,869

26,810

38,038

14,356

2009

36,539

38,242

41,428

40,232

38,968

28,206

25,544

56,376

39,566

35,870

70,146

23,382

33,635

64,436

40,466

27,529

47,309

30,916

44,196

16,717

2010

(continued)

41,799

42,062

47,878

46,206

43,194

33,169

28,868

64,252

46,976

42,837

81,109

27,486

40,654

70,918

47,078

32,103

52,723

36,665

52,230

19,469

2011

62 3 New Normal: Structural Upgrade

4.49

Maximum-minimum ratio

Data source Wind

2003

Year

Unit: yuan

Table 3.11 (continued)

4.46

2004 4.73

2005 4.69

2006 4.40

2007 4.37

2008 4.21

2009 4.20

2010

4.17

2011

3.3 Imbalance in Income Distribution and Improvement Measures … 63

64

3 New Normal: Structural Upgrade

Fig. 3.9 Average wage of industries with the highest and lowest income

between the average wage of industries with the highest and lowest income expanded from RMB24,013 in 2003 to RMB61,640 in 2011. In China, the highest-income industries were data transmission, computer service and software industries before 2008 and the financial industry after 2009. Agriculture, forestry, animal husbandry, and fishery have remained the lowest-income industries in China since 2003. Fourth, income gap between social groups. The income gap between urban and rural residents has widened. As shown in Table 3.12, the ratio of the per capita disposable income of the top 10% of urban households to that of the bottom 10% in 2000 was 5.02, which rose to 8.56 in 2011. In 2000, the per capita disposable income of the bottom 10% of urban households was 3,627 yuan lower than the national average. In 2011, the gap reached 14,934 yuan, showing that the absolute gap has been widening. As shown in Table 3.13 and Fig. 3.10, grouped by quintile of rural household’s per capita net income, the ratio of the per capita net income of the top 10% of rural households to that of the bottom 10% in 2000 was 6.47, which rose to 8.39 in 2011. In 2000, the per capita net income of the bottom 10% of urban households was 1,451 yuan lower than the national average. In 2011, the figure rose to 4,976 yuan, showing that the absolute gap has been widening.

3.3.2 Causes of the Income Gap in China’s Household Sector There are many deep-seated causes to the income gap in China, such as social, political, cultural, ethical issues and so on. The immediate course, though, lies with the income distribution institutions, policies and systems. In the following section,

6,280

6,860

7,703

8,472

9,422

10,493

11,759

13,786

15,781

17,175

19,109

21,810

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Data source Wind

Average income of urban residents

Year

6,876

5,948

5,253

4,754

4,210

3,569

3,134

2,862

2,590

2,409

2,803

2,653

Lowest (10%)

10,672

9,285

8,162

7,363

6,505

5,541

4,885

4,429

3,970

3,649

3,856

3,634

Low (10%)

14,498

12,702

11,244

10,196

8,901

7,554

6,711

6,024

5,377

4,932

4,947

4,624

Lower middle (20%)

19,545

17,224

15,400

13,984

12,042

10,270

9,190

8,167

7,279

6,657

6,366

5,898

Middle (20%)

26,420

23,189

21,018

19,254

16,386

14,049

12,603

11,051

9,763

8,870

8,164

7,487

Upper middle (20%)

Table 3.12 Per capita disposable income of different groups of urban residents by income

35,579

31,044

28,386

26,150

22,233

19,069

17,203

14,971

13,123

11,773

10,375

9,434

High (10%)

58,842

51,432

46,826

43,614

36,785

31,967

28,773

25,377

21,837

18,996

15,115

13,311

Highest (10%)

8.56

8.65

8.91

9.17

8.74

8.96

9.18

8.87

8.43

7.89

5.39

5.02

Maximum-minimum ratio

3.3 Imbalance in Income Distribution and Improvement Measures … 65

66

3 New Normal: Structural Upgrade

Table 3.13 Per capita net income of rural residents grouped by quintile Year

Average income of rural residents

Low (20%)

Lower middle (20%)

Middle (20%)

Upper middle (20%)

High (20%)

Maximum-minimum ratio

2000

2253

802

1440

2004

2767

5190

6.47

2001

2366

842

1512

2104

2905

5726

6.80

2002

2476

857

1548

2164

3031

5896

6.88

2003

2622

866

1607

2273

3207

6347

7.33

2004

2936

1007

1842

2579

3608

6931

6.88

2005

3255

1067

2018

2851

4003

7747

7.26

2006

3587

1182

2222

3149

4447

8475

7.17

2007

4140

1347

2582

3659

5130

9791

7.27

2008

4761

1500

2935

4203

5929

11290

7.53

2009

5153

1549

3110

4502

6468

12319

7.95

2010

5919

1870

3621

5222

7441

14050

7.51

2011

6977

2001

4256

6208

8894

16783

8.39

Data source Wind

Fig. 3.10 Income distribution between rural and urban residents and between different groups of rural and urban residents in China

we analyze China’s market-oriented primary distribution system, government-guided redistribution system and the tertiary distribution system dominated by the private sector.

3.3 Imbalance in Income Distribution and Improvement Measures …

3.3.2.1

67

The Market-Oriented Primary Distribution System in China Is yet to be Regulated

In the market economy, primary distribution is mainly regulated by the market. As China’s market mechanisms still need improvement, we face the following problems in primary distribution. First, wages and salaries for work are too low. Since reform and opening-up, China has been utilizing the comparative advantage of low labor costs in pursuing openingup. This, however, is achieved at the cost of reasonable wage, living conditions and minimum social security of the labor force. Meanwhile, as a result of capital globalization, capital is now in a position superior to labor. Local governments are competing for foreign investment to boost GDP growth, resulting in excessively low labor costs in the labor market. Moreover, due to absence of a proper pay rise mechanism in China, the growth rate of wages and salaries is lower than that of capital income. The income of the labor force does not reflect the value of their work. Second, the market for factors of production is underdeveloped. China’s market for factors of production such as capital, land, labor and technology is underdeveloped. Governments of all levels have been suppressing the prices of capital, land, and other scarce factors of production under their ownership, which disrupts the market competition. Taking advantage of their powers, governments have made substantial profit from land transactions by buying low and selling high. The interests of a large group of farmers, however, have thus been harmed. Real estate developers claim that they have bought land at high prices, which drives up housing prices in China. As housing prices stay high, wealth is transferring from the proletariat to men of property. Meanwhile, only state-owned capital has complete access to China’s capital market, which guarantees the dominant position of state-owned capital in the market, but impedes external financing. SMEs have been denied access to credit supply and pushed out of China’s credit market. In the securities market, stock prices cannot reflect the business performance of listed companies due to disconnect between stock prices and companies’ operating performance. As a result, only a small number of people have made huge profits, while most people have made a loss. Incomes in monopoly industries are excessively high. In China, as monopoly industries and companies enjoy special government subsidies or preferential policies, they are in an advantageous position in market competition, which leads to their huge monopoly profits, a large part of which becomes the income of their staff. This is why people working in the monopoly industry receive high income. Some monopoly companies are in charge of allocation of some state-owned assets. Their staff receive high wage and benefits even though these companies are operating at a loss. Due to high thresholds to some monopoly industries for private investment, private companies have been unable to enter these industries. Without effective competition, each of these industries have long been monopolized by one company, further contributing to income inequality.

68

3.3.2.2

3 New Normal: Structural Upgrade

The Government-Guided Redistribution System in China Is Underdeveloped

Income gap is inevitable in market-oriented primary distribution of income, and redistribution is required to level the income through redistribution. But China does not have a well-developed government-guided redistribution system, or well-conceived income-adjusting measures. First, taxes have a limited role. Tax is a main source of revenue for government, and an important tool for adjusting income distribution. A prominent feature of China’s existing tax system is that turnover tax such as value-added tax (VAT), consumption tax, business tax and so on accounts for a larger proportion, while the share of personal income tax and property tax is small. This contains the effect of tax in adjustment of personal income. As the income of high-income population mainly comes from property income, and the taxation systems for property tax and consumption tax in China are not yet well-conceived, there exists a grey area in personal income tax of high-income population. In addition, due to lack of social security tax, estate tax and gift tax in China, taxes can only adjust income distribution to a limited extent, further restricting the income-adjusting function of the taxation system. Second, the regulation of income redistribution through transfer payment system of governments is not sufficient. Transfer payment can, among others, significantly narrow income gap and increase fluidity in income distribution. China has put in more efforts on transfer payments between regions to regulate the income redistribution in recent years, but transfer payments have had only limited effect on income gap. This is attributable to the small size of equalization transfer payments, the aim of which is to narrow the revenue gap between regions and ensure equal access to public services. On the other hand, the size of special transfer payments is excessively large, while the relevant operation is not well regulated. Third, social security in China is underdeveloped. Social security is a way to distribute and redistribute national income, and an important measure to ensure social equity. Social security across China is unbalanced and underdeveloped in general. First, China’s budgetary spending for social security is inadequate. China’s budgetary expenditure on social security accounts for only 2–3% of its GDP, which restricts the development of social security in the country. Second, social security in China covers a small proportion of its population, as the existing social security programs in China are mostly for urban residents. Social security programs for rural residents have only been launched, which are far from sufficient. Third, social security in general is underdeveloped. The regional gap in development leads to unbalanced development of social security in regions. Poor residents in economically backward provinces and regions have very limited access to social security that can barely ensure their basic living conditions.

3.3 Imbalance in Income Distribution and Improvement Measures …

3.3.2.3

69

The Tertiary Distribution System Dominated by the Private Sector Is Not Well Regulated

The tertiary distribution refers to the distribution of income on the basis of free will after the redistribution. It’s re-allocation of social resources at a different level by means of donation, funding, fundraising and so on. With intermediary services as the carrier of function, a relatively independent system for re-allocation of social resources is established. So far, the development of charity and philanthropy in China is delayed by many bottlenecks. First, lack of laws and regulations. So far, China does not have any specific charity regulations or laws which, among others, regulate the establishment of charities. The mechanisms for operation and supervision of charities needs improvement. Without a complete legal framework regulating establishment and approval of charities, property ownership, supervision and regulation, investment and financing and other work relating to charities, some people intending to start charities can only wait, and some charities started by social forces have to do without. Second, overall charitable donations in China are small. We are not optimistic about the development of charities in China. So far, the share of charitable donations in China’s GDP has remained small, showing that the development of charity in China has lagged behind the economic development. In 2003, donations in the US totaled US$241 billion. That is equal to US$460 per capita, which accounts for 2.17% of its per capita GDP that year. In China, donations in the mainland of China was RMB57.88 billion in 2012. While donations in China reached a record high of RMB76.4 billion in 2008, the per capita donation was only US$4.99, 0.18% of its per capita GDP that year. The one-hundred-plus charities and social welfare organizations in China are of varied sizes and quality. The capital available to them in total is only 0.1% of the country’s GDP. The capital available to 1.2 million charities in the US totaled US$670 billion, composing 9% of the country’s GDP. Donations in China usually take place in disasters or emergencies, the bulk of which is organized by governments. For example, in the SARS outbreak in 2003, donations received by Beijing municipal authorities dealing with civil affairs were twenty-five times as much as the annual donation in other years. During the Wenchuan Earthquake in 2008, Chinese enterprises and individuals donated more than 50 billion yuan in one month. Though, such short-term donations have very limited effect on adjustment of income gap.

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3.4 Unbalanced Investment-Consumption Structure and Improvement Measures: Consumption Has Become a Driving Force for Development, Economic Rebalancing Remains an Arduous Task 3.4.1 The Final Consumption Rate Is Extremely Low, While the Investment Rate Remains High Despite rapid economic growth in China in the past three decades, the final consumption rate in the country has long been extremely low, and shown a trend of steady decline. The rate fluctuated between 62–68% in the 1970s and 1980s, and averaged about 61% in the 1990s. It has remained below 62% since 2001, and was below 52% for eight consecutive years from 2007–2014. In 2010, the final consumption rate in China reached a record low of 49.1%, far lower than the global average of above 70%. The share showed a trend of steady decline, dropping from 62.1% in 1978 to 51.2% in 2014, down 0.32% point annually. We are glad to note that after a long period of decline, such rate has hit bottom in China and begun to show moderate rise, up 50.2%, 50.8%, 51.0% and 51.2% respectively from 2011–2014. By contrast, the rate of investment in China has remained high and shown a trend of steady growth since reform and opening-up. It averaged 35.77% from 1978–1990, 37.6% from 1991–2000, and 42.57% from 2001–2014. Thanks to accelerated industrialization and urbanization and the strong performance of the real estate market, the investment rate in China has been rising rapidly since 2001. It averaged 45.86% from 2008–2014, and reached a record high of 47.33% in 2011. From 2012–2014, the investment rate in China was 46.45%, 46.49% and 46.04% respectively (see Fig. 3.11).

Fig. 3.11 Final consumption rate and capital formation rate

3.4 Unbalanced Investment-Consumption Structure and Improvement Measures …

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Fig. 3.12 Growth rate of GDP, final consumption expenditure and gross capital formation

3.4.2 Growth Rate of Gross Capital Formation Is Higher than That of Final Consumption Expenditure and Economic Growth Most of the Time The GDP of China has maintained a steady, rapid growth since reform and openingup. But the growth of GDP in China has been slower than that of gross capital formation. Moreover, the gap between their growth rates shows a widening trend. As a result, the share of gross capital formation in the country’s GDP, or the investment rate, has remained high and shown a trend of steady growth, while the share of final consumption in GDP, or the final consumption rate, has been excessively low and is still going down. From the global financial crisis in 2008–2010, the growth rates of China’s economy and its final consumption expenditure were apparently lower than that of gross capital formation, suggesting the persistence of structural distortion in the investment -consumption structure. In 2011 and 2012, we saw some improvement when growth rate of gross capital formation was lower than that of final consumption expenditure and economic growth in the same period. But the growth rate of gross capital formation rebounded and overtook the latter in 2013 (see Fig. 3.12).

3.4.3 Anemic Consumer Demand as Shown in Unbalanced Consumption Structure First, the general government sector accounts for a larger share of the final consumption expenditure in China, while the household sector accounts for a small proportion. Over the past three decades, the share of government consumption expenditure in the

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Fig. 3.13 Consumption rate of residents, rural residents, urban residents and government

total has remained between 13–17%, while that of household consumption expenditure dropped from the record high of approximately 54% to the record low of approximately 35%. Second, there is a wide gap between the consumption expenditure of rural and urban households. Urban household consumption expenditure composes a large share of the total household consumption expenditure. Meanwhile, the share of rural household expenditure has been declining. In the past ten years, the consumption rate of urban households in China declined from approximately 31% to about 28%, and that of rural households plunged from about 15% to about 8%. Calculated at prices of 2013 in China, the consumption expenditure of urban households in 2013 was about 3.5 times that of rural households. The ratio of urban household consumption expenditure to rural household consumption expenditure was about 1 in 1990 and approximately 2 in 2000. The gap is apparently widening (see Fig. 3.13).

3.4.4 Capital Formation Outperforms Final Consumption in Terms of Contribution to Economic Growth After Global Financial Crisis China’s GDP growth rate averaged around 9.8% for a long period. The share of the contribution of capital formation to economic growth surged from 14.6% in 1997 to 69.6% in 2003. As a result of measures to deal with the global financial crisis, the share reached a record high of 87.1% in 2009. In 2004, capital formation still contributed 46.7% to China’s economic growth. By contrast, the share of the contribution of final consumption to economic growth dropped from 87.1% in 1999

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Fig. 3.14 Contribution of consumer demand, investment demand and export to GDP growth

to 44.7% in 2008. The share went up after the global financial crisis, but it was only 51.6% in 2014. During the past years, final consumption have alternated with capital formation in making a dominant contribution to economic growth (see Fig. 3.14).

3.4.5 In China, Consumption Rate Is Significantly Lower than Global Average and Growth Rate of Consumption Is Lower than GDP Growth Rate, Which Deviates from the General Trend and Standard Structure of Economic Development Final consumption rate varies from country to country due to disparities in levels of economic development, economic aggregate and structure, development environment and other factors. Though, we observe some common trends and features in fluctuation of such rate in all countries. First, the final consumption rate is generally high and remains steady. Since the 1970s, it has been fluctuating between 75–80% at the world level and in countries of different income levels. It has remained at 80% in low-income countries and approximately the same in the US. China is not only inferior to industrial countries in consumption rate, but also lags behind other BRICS countries of similar economic development level. For example, the consumption rates in Brazil and India are both nearly 60%, far exceeding the rate in China. Second, the final consumption rates of countries show a steady growing trend, going hand in hand with GDP growth, or even faster. According to World Development Indicators of the World Bank, the annual consumption growth rate averaged 4.3% in both developed countries such as the UK and Japan and developing countries such

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Fig. 3.15 Investment rate of countries and regions

as Indonesia from 1991–2007. In the same period, the annual GDP growth rate was 3.7%. The growth rate of consumption was apparently higher than that of GDP. China is one of the countries with the highest investment rate in the world. Its investment rate is more than two times the global average (about 20%) (see Fig. 3.15). Compared with such rate at similar development stages of some countries like Japan and the South Korea, China’s investment rate is still higher. At the take-off stage, the capital formation (% of GDP) was 30 to 35% in Japan and below 37% in the South Korea. We compare the fluctuations of final consumption rate in China and the rest of the world. It shows that such rate in China is at a low level, and that the fluctuations in China deviate from the general trend of such rate. First, there is a wide gap between China and the global average in final consumption rate, and the gap shows a widening trend. Second, the final consumption rate in China is lower than in high-income and low-income countries. China’s rate is 10–20% points lower than in high-income countries, 15–22% points lower than in low-income countries and 8–18% points lower than in middle- and lower-middle-income countries (see Table 3.14). Third, the growth rate of consumption in China is lower than its economic growth rate, which is different from the global trend that growth in consumption is with GDP or even faster. In view of the deviation of China’s final consumption rate from the general trend and standard structure of economic development, China is confronted with severely inadequate domestic demand and extremely slow growth in consumption.

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Table 3.14 Household consumption expenditure (% of GDP) in China and other countries and regions % Country or Region

1990

2000

2005

2009

2010

2011

China

46.7

46.7

38.1

33.9

34.6

34.4

Hong Kong, China

57.1

59.0

58.2

62.4

62.2

Macao, China

39.2

40.2

31.1

26.8

22.7

20.7

Bangladesh

86.2

77.7

76.4

77.5

76.8

78.3

Brunei Darussalam

34.8

29.6

27.4

22.2

13.2 81.7

Cambodia

89.2

86.1

79.2

India

64.6

64.8

57.6

57.3

56.5

58.0

Indonesia

58.9

60.7

62.7

56.6

56.9

56.1

Iran

59.3

47.9

45.9

Israel

55.6

53.9

55.8

56.9

58.2

62.4

Japan

53.3

56.5

57.8

60.1

59.3

61.9

49.9

50.7

49.3

51.8

54.6

53.7

54.0

52.7

93.5

81.2

68.2

68.6

Kazakhstan South Korea Laos

49.4 69.0

Malaysia

51.7

43.8

44.8

49.9

48.0

Mongolia

68.7

69.6

55.2

58.1

53.1

50.2

Pakistan

73.8

75.4

77.0

81.2

81.9

82.4

The Philippines

71.5

72.2

75.0

74.7

71.6

77.9

Singapore

45.3

43.1

40.1

38.2

38.9

40.6

Sri Lanka

75.9

72.1

69.0

64.5

65.8

68.1

Thailand

56.8

57.2

57.8

54.8

53.7

53.6

Vietnam

84.3

66.4

62.5

65.9

64.9

65.8

Egypt

72.6

75.9

71.6

76.1

74.7

75.8

South Africa

57.1

63.0

63.1

60.3

59.4

59.4

Canada

56.7

55.4

55.3

58.7

57.9

Mexico

69.6

67.0

67.0

66.1

64.8

United States

66.6

69.0

70.1

71.2

70.9

Argentina

77.1

70.7

60.8

58.5

59.8

64.1 61.3

Brazil

59.3

64.4

60.3

61.1

59.6

60.3

Venezuela

62.1

51.8

46.8

64.5

57.1

64.3

Czech Republic

50.3

51.9

49.3

50.3

50.3

50.5

France

57.5

56.2

56.9

58.1

58.0

57.7

Germany

57.7

58.4

58.8

58.4

57.5

57.3

Italy

57.0

59.9

59.0

60.3

60.6

61.3 (continued)

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Table 3.14 (continued) % Netherlands

49.7

50.4

48.8

45.9

45.4

44.9

Poland

48.3

64.1

63.4

61.2

61.4

Russian Fed

48.9

46.2

49.4

52.5

49.6

52.1

Spain

60.5

59.7

57.8

56.1

57.7

58.3

Turkey

68.7

70.5

71.7

71.5

71.2

79.0

Ukraine

57.1

54.4

57.9

64.5

62.9

66.9

United Kingdom

62.2

65.6

65.0

64.2

64.0

64.4 53.0

Australia

56.6

58.4

58.0

53.5

54.1

New Zealand

61.0

59.7

59.5

59.3

58.6

Source World Bank WDI Database

3.4.6 The Unbalanced Proportions of Investment and Consumption and Structural Distortion in Investment and Consumption Have Severe Negative Impact on China’s Economy First, persistent unbalanced shares of investment and consumption may lead to wide fluctuations of the macro economy. Investment is a kind of final demand in a relative sense. As current demand in name, it is in fact supply in the following period. High investment boosts economic growth, but such growth is not sustainable. If the consumption rate remains low and disproportionate to investment rate, there would be no final demand to support the growth of investment. It would intensify the overcapacity issue and lead to new deflation in China, severely impeding the economic development of the country. Second, the rising investment rate and declining consumption rate in China will cause greater financial risks in economic activities. Excessively rapid growth in investment may result in not only blind expansion and overlapping projects, but also decline in investment efficiency. The problem of overcapacity arises in industries with blind expansion or overlapping projects. As a result, some enterprises made a loss, and even went bankrupt and closed, creating new bad debts for banks. Meanwhile, the decline in investment efficiency undermines enterprise’s ability to repay their debts, causing more financial risks. Third, the imbalanced between investment and consumption adds more pressure to employment and causes rising unemployment in urban areas, while impeding the growth of household income. The Chinese government has been making more investment in infrastructure construction and capital-intensive industries than in labor-intensive industries in recent years. But the growth in investment in infrastructure construction and capital-intensive industries cannot create as many jobs as the labor-intensive industries do. Considering the law of development of the three strata of industries, high investment rate and low consumption rate in China will

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lead to rising share of the secondary sector value-added and slow development of the tertiary sector. However, the tertiary sector creates far more jobs than the secondary sector. Fourth, due to imbalance between investment and consumption, the macro environmental and resource costs of economic development in China have been severely underestimated. The development of input- and energy-intensive industries in China has caused severe water and air pollution and more pressure on energy and raw material. Over the past three decades, China has witnessed rapid GDP growth at a rate of about 10%. But due to inadequate consumer demand, there is no sufficient internal force to drive the GDP growth. The Chinese government introduced policies to encourage export and addressed the inadequacy of domestic demand with net exports, thus maintaining the rapid GDP growth. But China’s net exports kept declining for years after the global financial crisis in 2008, and its economy began to show a downturn. China adopted an excessively easy monetary policy starting from 2009, which successfully reversed the declining trend of economic growth. Nonetheless, consumer demand remains inadequate. To make things worse, capital prices and consumer price index (CPI) surged and economic bubbles proliferated. The Chinese government had to tighten macroeconomic control to cap rising prices including housing prices. China’s economic growth was impeded by such policies. The country was confronted with sluggish economy that was very likely to hit bottom again. China found no perfect cure to address the wide fluctuations in its economy which had been a deep-rooted problem. During the Twelfth Five-Year period, the ratio of investment to consumption showed no apparent changes. But we are glad to note slow, minor improvements in the investment-consumption structure. The growth rate of investment experienced a sharper downturn than that of consumption expenditure. There are some signs of improvement in the demand structure. Consumption has become an important driver for economic development. These hard-won achievements are the products of macro-control over the years.

3.4.7 Causes of Low Consumption Rate and High Investment Rate in China At present, China is experiencing high investment rate and low consumption rate. Consumption’s contribution to economic growth in China is rather limited. The reason is that the CPC Central Committee’s decision to transform the model of development has not been fully implemented. A unified understanding is yet to be developed concerning the relationship between transforming development model and maintaining steady economic growth. High investment rate and low consumption rate in China are attributable to multiple factors such as the stage of economic development, income gap and access to public services. First, as China is undergoing rapid urbanization and industrialization, its industrial structure is also experiencing

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rapid changes and adjustments. Second, growth in income is slow, and the expected income is declining. Compared with economic growth and average income growth of urban and rural households, the government revenue and expenditure and corporation’s profits in China have been growing excessively fast. The unbalanced distribution of wealth and income continues to worsen. Third, the widening income gap impedes the growth in consumption. The gap between urban and rural areas, regions, industries and social groups of different income level, especially monopoly, leads to the declining share of wages and salaries in national income. Income gap causes great disparities in consumption. The bulk of the disposable income of middle- and low-income residents does not form effective purchasing power. Fourth, the stimulating effect of automobiles and commercial residential buildings on consumer goods market is diminishing. Fifth, inadequate public services provided by government gives rise to uncertainty about the future, which undermines people’s ability and willingness to spend. For example, many people are prudent consumers because of the level of development of social security in China. In view of the rising prices of housing, medical services, elder care and education, people have been ever more prudent about consumption and investment, which significantly reduces possible consumption. Sixth, the mechanisms for investment and financing in China are underdeveloped, and the assessment of local governments is not scientific. Due to deficiencies in investment and financing mechanisms, soft budget constraint of the micro investment mechanism, improper assessment of local governments, obsession with growth and disregard of development, many local governments have considered GDP growth their primary goal. Consequently, they are highly motivated to engage in investment, which inevitably causes unbalanced investment and consumption. Of course, we should be objective in our study of the proportion of investment to consumption and follow its development. We believe that high investment rate in China is in a sense justifiable and has positive effects. It is necessary for China’s future economic growth. We have achieved at this conclusion based on the following analysis. First, China is now advancing from the middle stage of industrialization to the late stage, and undergoing rapid urbanization. Both require high investment rate for economic development. Second, as the dependence of China’s economy on external demand is decreasing, high domestic demand, especially investment demand, is essential to a moderately high growth rate of the economy. Third, considering the high savings rate in China, high investment rate is required to achieve macroeconomic equilibrium. Fourth, high investment rate lays a solid foundation for sustainable growth in consumption in the long term. In the context of sluggish recovery of global economy and considerable downturn pressure on China’s economy, it is difficult to complete upgrading of the consumption structure in a short period, so, stability in investment remains pivotal to steady growth.

3.5 Imbalance Between Domestic and Foreign Demands and Improvement Measures …

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3.5 Imbalance Between Domestic and Foreign Demands and Improvement Measures: Imbalance Between Domestic and Foreign Demands and Incoordination Between Development of Domestic and Foreign Trade Are Alleviated As the domestic and international situations change, China is facing increasing challenges due to uncoordinated development of domestic and foreign trade and imbalance between domestic and foreign demands. Prominent problems include high dependence on trade, steady and significant growth of trade surplus and increasing foreign exchange reserves. The share of exports in China’s GDP, which was 35% in 2007 and 32% in 2008, dropped to 24% in 2009 in the aftermath of the global financial crisis. From 2010– 2015, such share was respectively 26%, 25%, 24%, 23% and 21%. China’s dependence on foreign trade was 62%, 57%, 44%, 49%, 49%, 46%, 44%, 42% and 33% respectively from 2007–2015 (see Fig. 3.16). The dependence on trade for countries with limited resources such as Singapore, Malaysia, Thailand and other countries that are built on trade is usually more than 100%. In other developed countries such as the US and Japan and developing countries such as Brazil and India, the dependence on trade is generally below 30%. Over the past twenty years, China has seen steady growth in its trade surplus. Its trade surplus, which was US$ 140.4 billion in 1995, rose to US$ 199.6 billion in 2000, soared do US$ 837.4 billion in 2005 and hit a record high of US$ 2,086.8 billion. After falling to US$ 1007.9 billion in 2011, it kept rising and hit a new record high of US$ 3,686.5 billion in 2015 (see Fig. 3.17).

Fig. 3.16 Dependence on exports and foreign trade

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Fig. 3.17 Trade surplus and foreign exchange reserves

Meanwhile, China has also seen rapid rise in its foreign exchange reserves. With huge jumps starting from 2004, China’s foreign exchange reserves exceeded 3.33 trillion US dollars as of the end of 2015. Export-oriented policies in China are not hard-and-fast rules. Such policies mainly had positive effect in the primary stage when China’s development was within the bearing capacity of the environment, supported by a huge labor force and sufficient resources. Nonetheless, considering from the perspectives of domestic resources constraint or the capacity of the international market, the extensive export-oriented model was not sustainable. It not only impedes implementation of the opening-up strategy over the long term and weakens its effect, but also hinders China’s development in many aspects. First, such model tends to engender international trade disputes, and it is vulnerable to trade protectionism. Second, the fruits of development are not shared by all, and the resources are not fully utilized. Third, it restricts China’s implementation of macroeconomic policies as a main source of excessive liquidity. Fourth, it has negative impacts on industrial upgrading in China. Overall China’s economy is export oriented. Before 2008, there was a serious imbalance between domestic and foreign demands in China. As its dependence on foreign demands remained high, foreign demands accounted for a larger share of the total, but had limited space for growth. On the other hand, potential of the faltering domestic demand was yet to be tapped. As China’s exports still follow an extensive growth model, judging from the domestic resources constraint and the international market capacity, the rapid expansion of China’s exports will not persist. After the global financial crisis in 2008, the imbalance between domestic and foreign demands was alleviated somewhat. China’s dependence on exports and foreign trade began to show a downturn. Over the past three decades, the share of net exports in the growth in aggregate demand has been volatile and shown wide fluctuations. It reached the highest point

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81

69.4% in 1990, and hit the record low of −51.2% in 1985. The contribution of foreign demands to China’s GDP also showed wide fluctuations. Foreign demands contributed much to the growth in aggregate demand before the global financial crisis in 2008. After the crisis, however, the contribution of foreign demands t aggregate demand plunged to −44.8% in 2009. Apparently, international economic situation had significant influence on China’s demand structure. The declining foreign demands in recent years are attributable to several factors. First, the profound changes in the world economic landscape make it more difficult for Chinese enterprises to increase exports. The world economic landscape has been undergoing profound changes since the global financial crisis. Major economies are unbalanced in recovery. Seeking development in a complex international situation, China is under the pressure of both developed and developing countries in exports. Due to measures taken by the US and other developed countries such as reindustrialization and National Export Initiative after the global financial crisis, China is facing fiercer competition in the high-end market in export, which impedes the export growth. Meanwhile, China is losing its advantages in labor cost. Some laborintensive industries and orders are transferring to developing countries in Southeast Asia and other regions. Some labor-intensive products have been replaced by similar products of other countries. In addition, as China’s foreign trade continues to grow, China is confronted with rising protectionism and increasingly fierce competition in the international market.

Chapter 4

New Normal: Innovation-Driven Development

The competition in overall national strength, in essence, is about innovation. As the world economy is undergoing profound changes and new technological and industrial revolutions are emerging, China is facing both enormous challenges and opportunities. In such a context, China has been striving to shift the driving force for development to improved quality and performance. In the Thirteenth Five-Year period and even a longer period of time, we must focus on accelerating implementation of the innovation-driven development strategy and making China an innovative country. We should have a broader and deeper understanding of innovation rather than confining ourselves to its technological aspect. We must realize that innovation means more than technologies. We should pursue innovation in every aspect including theories and ideas, institutions and systems, development model, science and technology and social management. We must improve our innovation-related work and expand from focus on innovation process and achievements to motivating innovators, creating an enabling environment for innovation, developing innovative human resources, and fostering a culture of innovation. We should encourage innovation in every aspect of business and creating to promote mass entrepreneurship and innovation, and drive economic and social development with innovation. With implementation of the innovation-driven development strategy, great efforts should made to promote innovation in science and technology, industries, enterprises, market, products, business forms, management and other areas. As a result, an economic system and development model mainly guided and supported by innovation will take shape. Innovation will become a fundamental driving force for economic development, transformation and upgrading. It is foreseeable that innovation-driven development will replace the development driven by input and investment and become the new normal in China.

© Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_4

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4 New Normal: Innovation-Driven Development

4.1 The Current State and Problems of Science and Technology in China, and Challenges and Opportunities 4.1.1 The Current State of Science and Technology in China On the whole, China’s technological strength has improved significantly. Science and technology have been an important contributor to China’s economic development. China has been deepening reform of the scientific and technological system and making steady progress in construction of the national innovation system. Now China has a comprehensive system for technological research and development, and leads developing countries in terms of the overall development level of science and technology. China’s primary innovation capability shows a rising trend. In 2012, China was the second largest producer of papers published in SCI journals, and the Chinese Academy of Sciences ranked second out of over 3,000 research institutions and universities across the world in research performance. High-tech industries in China are developing rapidly, the growth rate of which is two to three times the economic growth rate. As China’s export is expanding, the export of high-tech products has been growing at a faster pace and even multiplying, registering an annual growth rate of 60%. China’s R&D expenditure rose significantly to RMB 861 billion in 2011, or 1.83% of the GDP that year. The Chinese government has increased expenditure on the National Natural Science Foundation, 863 Program, 973 Program, Project 985 and Knowledge Innovation Project, and enhanced support for cutting-edge basic research, primary innovation and major science and technology infrastructure. As a result, we have seen a batch of major science and technology achievements and great progress in sixteen major national science and technology projects. China is leapfrogging in key areas with significant breakthroughs including success in manned space program, lunar exploration, rendezvous and docking in space. We have overcome key technological problems in high speed rail, manned deep-sea submersible and other major national projects, and attained world-class achievements in areas such as neutrino oscillation, iron-based superconductivity, quantum communication, totipotency of iPS cells, origin and evolution of life and so on. China has resolved the problems that have long plagued the country, such as insufficient investment in science and technology, brain drain, outdated infrastructure, inadequate demand and lack of an enabling environment for innovation (Fig. 4.1).

4.1 The Current State and Problems of Science and Technology in China …

85

Fig. 4.1 Achievements of some major science and technology programs in recent years

4.1.2 Prominent Problems with Innovation in China: Insufficient Capability to Conduct Independent Innovation and Major Deficiencies in the System for Independent Innovation 4.1.2.1

Insufficient Investment in Innovation from the Government and Poor Quality and Efficiency of Technological Innovation

Generally speaking, the expenditure on innovation in China is far from sufficient. Funding gap has long been a main constraint on China’s innovation capacity. The share of China’s R&D expenditure in its GDP remained 0.6–0.7% in the late twentieth century. The figure rose to 1.23% in 2004, and kept rising year by year, reaching a record high of 1.75% in 2010. Nonetheless, it still fell short of the requirement for innovative countries, i.e., 3–5% of the country’s GDP. Insufficient expenditure on innovation is the result of many factors over a long period. Therefore, it will be a long and gradual process to raise the research spending in China, which shall be supported by other reforms. Meanwhile, the research spending of Chinese enterprises accounts for only 1.52% of their sales revenue, including 0.66% on development of

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new products. For Forbes 500 companies, the R&D spending of generally accounts for 5–10% and even more of their sales revenue. The structure of Chinese government’s investment in education is unbalanced. The investment in higher education accounts for an excessively high proportion of the total, while the share of investment in preschool education, primary and secondary education and vocational education is too low. Prominent issues such as inequalities in access to basic education, market orientation in school operation, and huge sponsorship fees and school-selection fees cause great financial and manpower pressure on Chinese households. The problems have even undermined inter-generation equity and impeded social mobility. The higher education system in China is rigidly hierarchical, riddled with obsession with administrative rankings. Universities have little autonomy, and many decisions that should have been reached by universities are made by administrative authorities. Principals and other management personnel of universities have different administrative rankings. Universities, where people are supposed to foster talents, create knowledge and pursue excellence, are filled with struggles for higher administrative ranking, resources and fame. Education authorities set too many and too high market access barriers to private schools, but their requirements for credentials of education practitioners are rather limited and relaxed. The investment in basic research in China is too low. China is one of the leading countries in innovation in terms of aggregate indicators. Regarding innovation output, for example, China has overtaken most developed countries and leads the world in terms of the number of patent applications and research papers (which are important indicators of the output of science and technology research). As for investment in innovation, China’s R&D spending has been on the rise over the years. In 2014, China’s R&D spending reached 1.34 trillion yuan, accounting for 2.1% of the GDP that year. But considering the fierce international competition, the R&D intensity, reserve of research personnel, and utilization efficiency of research personnel and funds in China are far from satisfactory, and the added value of intellectual property rights is low. For instance, the spending on basic research in China accounts for a small proportion, below 5%, of the total R&D spending. In main innovative countries, the share is generally 15–30%. With low expenditure on basic research, China has not seen much primary innovations. In addition, there is a wide gap between China and developed countries in indicators of the quality and efficiency of technological innovation. China is a large producer of research papers, but the citation rate of its papers is rather low. In China, patent licensing income is far less than patent royalties, suggesting that China is mainly a technology importer. Many patents in the country do not have high economic value. The input–output efficiency of research personnel is not high.

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The Existing Technological Innovation Capacity Cannot Satisfy the Requirement of Economic and Social Transformation and Development

Technological innovation is the fundamental driving force for economic and social transformation and development in China. Despite some enhancement in China’s innovation capacity in recent years, it still cannot satisfy the requirement of transformation and upgrading of the industrial structure, and the long-expected shift of growth drivers is yet to be seen. A prominent problem arising from inadequate innovation capacity is that China has a heavy dependence on developed countries in core technologies that are essential for development of many industries. In 2013, the value of imports of integrated circuits in China totaled US$231.3 billion, more than that of crude oil.

4.1.2.3

The National Innovation Management System Is Yet to Be Developed

So far China has not established a state-level system for independent innovation. Effective macro-control and strategic coordination are absent in organization of innovation activities, allocation of innovation resources and supply of innovative institutions. Prominent problems include the following. First, relevant authorities and regions are not well-coordinated in organization of innovation activities, resulting in overlaps, failing to leverage China’s institutional advantages of mobilizing resources for major undertakings. Second, the R&D systems and industries for military and civilian purposes have long been separated, resulting in closed innovation systems in military and civilian sectors and considerable separation between them. Some major R&D activities conducted in these two sectors are overlapping. This goes against the trend of civil-military integration and development of dual-purpose high technologies. Third, in government’s management of technological innovation, project management remains a major tool for authorities. Existing policies in China cannot give strong boost to innovation, and the binding effect and continuity of policies are unsatisfactory. Preferential tax policy for novel products is an illustration of such deficiencies.

4.1.2.4

The System for Science, Technology and Education and the Administration System for Scientific Research Call for Immediate Reforms

The system for science, technology and education in China cannot satisfy the requirement of economic and social development. Allocation of scientific and technological resources is overlapping, discrete and inefficient. Departments work in isolation in research, resulting in a large number of low-quality overlapping research projects,

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failing to create a synergy. It is still difficult to transform research results to productivity, and research and production remain separated. Research facilities and technological innovations funded by fiscal revenue have not been fully utilized, because they are only for internal use. The administration system for scientific research is facing challenges and calls for immediate reforms. In China, scientific research is administered by more than one authorities, including the National Development and Reform Commission (NDRC), Ministry of Industry and Information Technology, Minister of Science and Technology, Office of the Central Cyberspace Affairs Commission and so on. The lack of coordination between authorities and fragmented allocation of technological resources lead to segmentation, inefficiency and waste of resources. In China, research institutions are mostly funded by the government. Their administration systems of research funds cannot address the actual needs. Allocation of research funds is mostly dominated by administrative or management personnel and unreasonable. The assessment mechanisms of government-funded research projects are yet to be improved. Research institutes have difficulties in commercialization of research achievements. Enterprises, universities and research institutes are separated. As China does not have a proper mechanism encouraging cooperation between enterprises, universities and research institutes, and lacks application-oriented research institutes, research achievements of universities and research institutes usually fail to address actual needs. Due to lack of effective mechanisms for commercialization, many scientific and technological achievements are simply put aside and never put in application. This has dampened the enthusiasm for innovation of research institutes and universities, and impeded technological progress. More importantly, it hinders the development of innovators and their innovation capability. Enterprises in need of technologies find it difficult to build cooperation with appropriate research institutes. A prominent problem is that research in universities is divorced from production in enterprises. Universities are playing a bigger role in the national innovation system. But a long-standing problem is that the links between universities, spreaders of knowledge, and enterprises, users of knowledge, are rather weak. Curricula of many universities fail to consider the needs of enterprises. Students’ activities in universities are more about knowledge acquisition than knowledge creation. As a result, many graduates find what they have learned impractical. Universities must make great efforts to adjust their admission requirements, careers service, curriculum and so on, so as to provide enterprises with innovators and innovation training services. Thanks to the collaboration between universities, research institutes and enterprises starting from the 1980s, disconnection between universities and enterprises and the market has been alleviated. But as such collaboration is promoted nationwide, some problems have emerged. Examples include unclear rights and responsibilities of the cooperating parties, lack of an effective management system, and insufficient coordination between universities, research institutes and enterprises. All these have undermined the effect of their collaboration.

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There Are No Development and Incentive Mechanisms Encouraging Innovation, and the Research Talent Structure Is Unbalanced

For a long time in China, in admission to universities and talent selection, we placed too much emphasis on exam results, and paid little attention to ethics, innovation capability and overall caliber. At universities and research institutes, performance evaluation for professional titles and promotion is primarily based on publications and does not take into account such things as patent, copyright and commercialization of innovation. The quantity, quality and structure of human resources in China cannot meet the demand of the job market, modernization drive and efforts to make China an innovative country. Collaborative R&D and innovation, especially technological innovation of small and medium-sized enterprises, are impeded by deficiencies in public platforms for R&D and technological innovation. Commercialization of innovations is hindered by underdeveloped intermediary services. Innovators who are brave to take risks are not given sufficient positive incentives, making it difficult for high-caliber innovators and top researchers to come into prominence. This also increases the difficulty of attracting and retaining the limited number of high-end talents and realizing their full potential. To develop innovative human resources, we must cope with another prominent problem: unbalanced structure of research personnel and the small proportion of research personnel in the total population. During the past years, the number of researchers in R&D per million people in China was one tenth of the number in Japan and Russia, and one quarter of the number in South Korea and the US. The distribution of these researchers in China are not balanced, with 67% of them in education and healthcare systems, 16% in foreign-funded and private enterprises, and 17% in state-owned and collective enterprises. Due to deficiencies in incentives and preferential policies for talents in enterprises, these researchers are not motivated to engage in innovation. Such unbalanced distribution of researchers in China has resulted in an acute shortage of researchers in high and new technologies essential for China’s participation in global economic competition, and serious lack of motivation for innovation.

4.1.2.6

The Existing Tax Policies in China Fail to Provide Adequate Support and Incentives to Enterprises in Innovation

The 15% preferential income tax rate for high-tech enterprises is abused to some extent. In China, the standard corporate income tax rate is 25%. But the tax rate could be reduced to 15% for enterprises accredited as high-tech ones, which is a generous preference. Some enterprises, eager for instant benefit, seek to obtain hightech enterprise status simply to qualify for the 15% tax rate. For example, some enterprises overemphasize the quantity of patents, because they must, among others, have a specified number of patents to be accredited as high-tech enterprises. But the value of their patents is mostly not high. As a result, China has been leading the

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world in patent applications over the years, but it still has a long way to go to become an innovative country. It is hard to implement tax policies granting additional deductions for R&D expenses of innovative enterprises, mainly because of the difficulty in ascertaining such expense. This has caused two major problems. First, the scope of R&D expense qualifying for deduction is indefinite. The R&D expense of enterprises recognized by tax authorities is usually far less than the practical sum. As a result, some high-tech enterprises and scientific service enterprises engaging in high value-added activities are shouldering a heavier tax burden, though the policies are supposed to cut the tax. Second, for more tax deductions, enterprises are prone to make a false report of their R&D expense, which is hard to be verified by tax authorities. The existing preferential tax policies in China have structural problems. For example, there is no preferential tax policy for angel investment in innovative micro and small startups. The taxation system in China, in implementation, encourages more investment in short-term securities than in long-term equity.

4.1.2.7

Inadequate Laws and Regulations on Protection of Intellectual Property Rights (IPR) in China Leads to Insufficient Protection and Enforcement of IPR

China faces a difficult situation regarding the protection of IPR. On one hand, with a comprehensive system of laws on IPR at the state level, China has been enhancing its enforcement of IPR and improving education relating to IPR. But on the other hand, the IPR awareness and management of Chinese enterprises remain the weakest link in China’s efforts to establish the IPR system, and call for improvement. Due to inadequate laws and regulations on IPR, there are no definite regulations on property ownership of research achievements enabled with support of national technological resources and those of teachers and researchers of universities and research institutes as part of their work for hire. Ownership of property rights fails to play a part as an incentive, severely impeding technological innovation and commercialization of technologies. Without a favorable environment for development, sound system and adequate policies, the IPR protection in many industries calls for urgent improvement. Their IPR management lags far behind the development of IPR in the world. The IPR management system and mechanisms are inadequate in these industries. Their understanding of IPR protection is outdated, and their awareness of IPR protection is low. Insufficient protection of IPR by administrative and judicial means has severely dampened enterprise’s enthusiasm for technological and product innovation. Some local governments interfere in IPR enforcement to protect local enterprises. Some enterprises restrict competition and hinder innovation by abuse of IPR.

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Enterprises Do Not Take a Principal Position in Innovation in China

There is an excessive degree of state intervention in R&D and technological innovation in China. The government decides the priorities of scientific and technological development and key technological areas, and organizes human resources, funds and material to make technological breakthroughs. With high input and low output, this has led to serious waste. Without a system for technological innovation in enterprises, enterprises, which are supposed to play a principal role in innovation, have failed to do so. State-owned and monopoly enterprises lack the motivation for innovation. Small and medium-sized enterprises fail to play a role in innovation due to absence of a sound system for innovation and entrepreneurship. Though enterprises are motivated to make technological innovations, due to inadequate reforms, there is no sufficient demand to boost their innovation. With low spending on technological innovation, enterprises do not have any well-developed mechanisms for organization of technological innovation, and their technological innovation capacity is limited. Such situation is attributable to three reasons. First, surviving takes priority over any other matter in management of enterprises. Enterprises are either too busy to think about innovation or so near-sighted that they fail to realize the value or significance of innovation. Second, innovation does not bring any economic benefits, or profits. As a result of insufficient IPR protection in China, enterprises have to bear huge cost if they seek legal redress. This has significantly dampened their enthusiasm for innovation. Third, innovation in enterprises lies on a weak foundation. Due to inadequate support for technological innovation over the years, enterprises do not have the capacity or innovative talents to engage in innovation. Primary innovation in Chinese enterprises is hindered by problems and deficiencies of the system for independent innovation. These enterprises are still catching up, only capable of incremental innovation. Their lack of innovation capacity also leads to the following problems. First, weak capacity to digest and absorb imported technologies. In the early stage of reform and opening-up, China followed the strategy of trading market for technologies, aspiring to improve its secondary technological innovation via importing technologies and digesting and absorbing imported technologies. In practice, however, people attached more importance to import, use and imitation of foreign technologies, but belittled the importance of digesting and adaptation of such technologies and innovation. Enterprises lacked the motivation to create technological innovation. To obtain an advantageous position in the market, they focused on application of foreign technologies and their business performance in the short run, giving no consideration to long-term development. This is especially true in joint-venture automobile enterprises in China. Enterprises downplayed the digesting and absorbing of imported technologies, spending more on technology import than on digesting and absorbing. In those years, the ratios of expenditure on technology import to that on technology digesting and absorbing in Japan and South Korea were 1:5 and 1:8 respectively,

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while in China, it was 1:0.07. Consequently, China was unable to develop technologies or products with independent IPR. Enterprises are also demotivated by consumer’s blind worship of foreign goods. Second, limited number of home-grown inventions. There are wide gaps between Chinese enterprises and their counterparts in developed countries in three aspects. First, Chinese enterprises own fewer invention patents. During the recent years, the invention patents in China were mostly granted to foreign companies, the only exception being the year 2010. In that year, the invention patents of Chinese enterprises outnumbered those of foreign companies, accounting for 54.8% of the total. Though, invention patents owned by Chinese enterprises account for less than half of the cumulative total over the years. Second, the invention patents of Chinese enterprises are of low quality. Patents of Chinese enterprises are mainly utility patents and design patents protecting technological innovations made via improvements to existing products and services. There are only a small number of high-value invention patents protecting primary innovations. Third, many Chinese enterprises do not own any patented technology. In Chinese enterprises with IPR of core technologies account for only 0.3% of the total, and those with patented technologies constitute 1% of the total. More than half of Chinese enterprises do not own any trademark, most of which rely on assembly, imitation and OEM for business development. Due to lack of core technologies, for a long period, China has been at the low end of the value chain in global manufacturing industry, and remained engaged in low-end manufacturing in the global market.

4.1.3 Challenges and Opportunities in China’s Development of Science and Technology Despite considerable progress in science and technology, China still lags behind in science and technology. We still lack the capacity for primary innovation and innovation by system integration. We need more researchers of strategic importance who have a holistic view and more researchers who can lead to make technological breakthroughs. The conflict between relations of production and productive forces in the science and technological field remains acute. The approaching Third Industrial Revolution will pose great challenges to China and threaten its role as the “world’s factory”. On the other hand, it means a window of opportunity for China to achieve leapfrog development.

4.1.3.1

China’s Position as the Top Manufacturing Country Is Under Threat, Posing Challenges to Its Further Development

Over the past three decades, China has caught up with and even surpassed major developed economies in the size of manufacturing industry. In 1980, China accounted

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for 4.78% of global manufacturing value added. The figure rose to 18.85% at the end of 2010, making China the top manufacturing country. But China’s leading position in the global manufacturing industry is likely to be threatened by the approaching Third Industrial Revolution and the consequent changes in production and use of energy, ways of life and production, processes and organization of production and so on. Overall, China’s manufacturing enterprises are at the low and middle end of the manufacturing industry. It is likely that they will gradually lose their comparative advantages. Though China leads the world in terms of the size of manufacturing industry, it is far from a power in the manufacturing industry. In particular, China does not have large world-class enterprises and famous brands, and accounts for a small share of high value-added links in global industrial chains. Due to insufficient expenditure on R&D in the industry, China is facing technological barriers that make it difficult for enterprises to stay ahead in market competition. In recent years, thanks to China’s increasing emphasis on R&D, the share of R&D expenditure in its GDP rose from 0.6% in 1995 to 1.6% in 2011. But there is still a wide gap between China and developed economies. The US and other developed economies in Europe have engaged in R&D for a long time and have accumulated advantages which give them dominance in technology. They have thus established international standards for technological parameters, constituting barriers to China’s endeavor to shift to high-end manufacturing. The re-industrialization strategies of developed economies creates more difficulties for China’s strategic transformation of the manufacturing industry. As far as we know, re-industrialization strategies of the US and other developed economies in Europe focus on two aspects. First, promote recovery of local manufacturing industry with export and investment to re-gain advantages in competition. Second, encourage overseas manufacturing enterprises to return to their homeland. With implementation of such strategies, China’s manufacturing industry is facing increasingly fierce competition and shrinking external demand, posing great challenges to China’s manufacturing enterprises. It is possible that the strategic transformation of China’s manufacturing industry will slow down significantly. It is also likely that transfer of foreign-funded manufacturing enterprises from China to developed economies will result in greater employment challenges and difficulties in structural transformation of the labor force in China.

4.1.3.2

New Industrial Revolution Provides Opportunities for China to Achieve Leapfrog Development

The First Industrial Revolution made the UK the world’s factory and an economic hegemon. The Second Industrial Revolution enabled the US and Germany to overtake the UK. The Third Industrial Revolution will inevitably cause severe challenges for China’s manufacturing industry, but it also provides a window of opportunity for China to achieve leapfrog development. Therefore, we must take the following actions to get prepared for the new industrial revolution.

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First, we must move faster to enhance our innovation capacity and make breakthroughs in key technologies of digital manufacturing and smart manufacturing. The new digital information technology and internet technologies are essential for transformation from automatic manufacturing to digital manufacturing. China has made some progress in R&D of relevant technologies. But we still lag far behind developed economies in view of their advanced technologies, especially in industrial application of digital information technology. More favorable policies are required to enable faster progress in key technologies and industrial application of these technologies. Second, we must proactively adapt to the development trends, promote the integration of the manufacturing industry with the service industry and pay attention to the important role of market demand in industrial innovation. The new industrial revolution will create conditions for global industrial reshuffling. Economies that follow the trend of history and get a head start will seize the initiative in future. Revolution in energy production and consumption, way of production, processes and organization of production, way of life and so on means both challenges and opportunities for China. We must find commonalities between China’s strategy of development via structural adjustment and the trend of future revolution, which will help China grasp the opportunities to achieve development and make new breakthroughs. Third, we must accelerate reform of the education system and change our mindset about talent development to prepare human resources for the Third Industrial Revolution. High-caliber professionals are of greater value in future market as a result of discrete production. We must be more flexible in curriculum design and modification for higher education, improve our education system to satisfy the future manufacturing industry’s need for professionals in the fields of design, IT, marketing and so on, and make greater efforts to foster innovators and educated workforce. All these will contribute significantly to China’s integration into the new industrial revolution.

4.2 The Concept of Innovation and Advice on Implementation of the Innovation-Driven Development Strategy to Make China an Innovative Country 4.2.1 We Must Have a Comprehensive and Accurate Understanding of the Concept of Innovation As China’s economy enters the new normal and is shifting its driving force from factors of production to innovation, how should we understand the concept of innovation? The American economist Joseph Alois Schumpeter, well-known for his theory of innovation, claimed that the essence of innovation is “creative destruction”. Based on in-depth analysis of the static circular flow and the fundamental phenomenon of

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economic development, he introduced the following five situations as innovation: (1) The introduction of a new product, i.e., product innovation, by manufacturing a product with which consumers are not familiar or with essential differences from existing ones; (2) The introduction of a new method of production, i.e., process or technical innovation, by adopting a method of production and operation that has never been used in the sector concerned; (3) Opening a new market, i.e., market innovation, by opening a market into which a country or the sector concerned has not previously entered, whether or not this market has existed before; (4) Acquiring new sources of raw material or semi-finished product, irrespective of whether this source has been previously available or whether it is first created; (5) Adopting a new corporate structure, i.e., innovation of organization and management. Examples include creating new organizational structures in the industry, creating or breaking a monopoly position. As reiterated by President Xi Jinping, innovation is an important driving force for development of any country and nation. The essence of competition of comprehensive national strength is about innovation. To accelerate the establishment of an economic system and development model mainly driven and supported by innovation, we must continue to implement the innovation-driven development strategy, and promote innovation in science and technology, industries, enterprises, market, products, forms of business, management and so on. The innovation we promote covers a broad range. It is mainly different from the previous concept of innovation in two aspects. First, unlike traditional understanding of innovation in its narrow sense, namely, mere technological innovation, we are talking about innovation in the broad sense. We promote strategic, systematic and comprehensive innovation in multiple areas and on different levels, including theories and concepts, systems and institutions, model of development, science and technology, social management and so on. Second, enterprises are previously considered the only participants in innovation. According to our understanding of innovation, every member of the society is an active innovator. In our pursuit of innovation, we attach great importance to unleashing the innovation potential and power of the public, raising people’s awareness of innovation and giving full play to their wisdom. While the government plays a guiding role in the process, we also act proactively to arouse the enthusiasm of enterprises, individuals, public organizations and civil societies for innovation, entrepreneurship and creation. Our aim is to foster innovative spirit across China and enhance the country’s innovation capacity in all manners. Innovation as a driving force covers at least the following areas: First, theoretical innovations. Innovation does not come from fantasy. It has its root in practice. The CPC Central Committee has proposed many innovative theories, concepts and practices, such as “using rural areas to encircle cities”, rural land reform, reform and opening-up, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, the Scientific Outlook on Development and so on. They are all based on domestic and international situations and development trends in different stages of development. These theories and concepts are the fundamental ideological guarantee for China’s steady and fast economic development and building of a moderately prosperous society in all respects. Among innovation in multiple

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areas, innovation of theories and concepts is the most important. It is prerequisite for practice, and the fundamental guarantee for organizations and enterprises to remain vigorous and triumph in fierce competition. Second, innovation of systems and institutions. Since founding of the People’s Republic of China, especially during the past three decades since reform and openingup, China has always considered innovation of systems and institutions an important task in economic development. Now we have completed the fundamental transition from a highly-centralized planned economy to a socialist market economy. But under the strong influence of tradition, due to institutional and systemic barriers, China has run into a bottleneck in its pursuit of comprehensive, coordinated and sustainable economic and social development. In future, we must grasp the opportunities that have emerged from the profound transformation of global economy and market, and turn challenges into opportunities. We must proactively adapt to the new normal of economy, and promote institutional and systemic reforms for modernization of the national governance system and capacity. We will move faster to establish systems and institutions that are conducive to scientific development and transformation of economic development model. We must integrate economic growth, transformation of economic development model, industrial structure upgrading, innovation-driven development, institutional and systemic reforms and other major tasks. We should promote innovation in development and seek development through innovation. Third, innovation of the model of development. China has long been reliant on input of material factors and foreign markets for economic development. Consumption fails to play a sufficient role in boosting economic growth. Consumption of resources and energy remains high. The environment is under heavy pressure. Slow salary growth leads to increasingly serious problems in income distribution. Increasing uncertainties in social management constitute a threat to China’s sustainable economic and social development. At the Seventeenth National Congress of the CPC, it was decided that we should accelerate transformation of the model of economic development and promote industrial structure upgrading in China through transformation of industrial structure, demand structure and input of factors of production. The decision represents a shift of focus in China’s economic work from size expansion to quality enhancement. In the Thirteenth Five-Year Plan period and even a longer period of time, China will experience increasingly acute structural conflicts in economic and social development, and face new pressure due to changes in international economic environment. We must promote comprehensive and systemic innovation in the model of development to address these conflicts and challenges. For innovation in methods and model of economic development, in addition to transformation of the model of economic development, we must seek innovation in transformation of structure (such as demand structure, industrial structure, rural–urban structure, regional structure, income structure), quality of development, economic effectiveness, income distribution, environmental protection, urbanization, industrialization, modernization and so on. Through innovation in all respects, we aim to improve the quality and efficiency of economic development, unleash the potential of the society, and accelerate the transition from input- and investment-driven economic development to one driven by innovation and consumer consumption. We

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will vigorously promote the development of emerging industries of strategic importance, make breakthroughs in industrialization and informatization, and accelerate rural–urban integration and coordinated development between regions. Fourth, innovation of science and technology. Science and technology are primary productive forces. A country’s capacity for science and technology innovation, which is an indication of its core advantages in competition, is the key driving force for economic development. Over the past thirty-plus years, China has given full play to its comparative advantages in labor. But the contribution of science and technology to economic development has been small, disabling China from leapfrog economic development. We must accelerate our efforts to improve the technological innovation system integrating resources of the government, enterprises, research institutes and universities, which will inspire enterprise’s motivation to engage in technological innovation and improve their capacity in this regard. We should also deepen reform of the science and technology system and improve the development mechanism to make research institutes a vanguard in building China into an innovative country. Fifth, innovation of social management. Since reform and opening-up, social management has never been covered in China’s macro-economic control. Instead, it is considered a regular tool to address social issues and a regulating valve for social stability. After the global financial crisis, social management policies were included for the first time as a solution to economic issues and became an important enabling factor of economic growth. In preparation of future short-term macro-control policies and medium- and long-term plans for economic and social development, we must remove the systemic and institutional barriers that have impeded China’s social development, and incorporate social security system in these policies and plans. We should continue to deepen reforms of social programs, especially reforms of the education system, medical and healthcare system and cultural system which are closely related with the people’s wellbeing. We should establish and improve the systems and institutions for coordinated development of recreational and competitive sports, improve the system of social management at the community level, and proactively carry forward with the reforms of public institutions and intermediaries. While maintaining economic development, we must pay attention to conflicts concerning people’s lives and address such conflicts with firm resolution and greater efforts, so as to prevent threats to China’s development due to internal factors of insecurity. We must ensure people’s access to education, employment, medical services, elderly care and housing, and build a harmonious society. In summary, the concept of innovation covers both abstract and concrete aspects. Cutting-edge technologies, patents and inventions, and new products, organizations, industries, business forms and markets are all indispensable for innovation. But these must be supported by innovation in concepts, innovation awareness, environment, policies, rules, institutions, and laws encouraging innovation and innovative talents. We must combine the concrete and abstract facets to increase public awareness of innovation in economic and social development, so that innovation will become a driving force for the country’s development. All in all, innovation concerns not only science, technology and economy, but also the society and people’s lives. Innovation is about making the world a better place and our lives better.

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4.2.2 Build an Innovative Country by Implementing the Innovation-Driven Development Strategy First, we should design new national strategies for innovation. The fundamental solution to transformation of the model of economic development in China is making China a country of innovators. Innovation is the concrete expression of a country’s core competitiveness and modern governance capacity. Making China a country of innovators is an overarching strategy which promotes comprehensive innovation in not only technology, but also in concepts, systems and institutions, model of development, social management and so on. To this end, we must foster innovation spirit across the country and arouse public enthusiasm for innovation. We will design new policies and plans to implement the innovation-driven development strategy. In addition to accelerated efforts in major national science and technology projects, we should pool resources and promote coordination in more major science and technology programs and projects of strategic importance. We must accelerate the state-level planning for innovation-driven development and establish mechanisms at both macro and micro levels to encourage and ensure innovation. We will conduct pilot reform for all-round innovation in some provinces, regions and municipalities to create regional innovation platforms that can serve as demonstrations of innovation and stimulate the development of other regions. We should encourage innovation among the public and enhance their innovation capacity. We must arouse the innovation enthusiasm of governments, enterprises, social organizations, individuals and so on, which will provide inexhaustible driving force for China’s long-term development. Second, we should increase government spending on technological innovation and scientific research. We must ensure that a reasonable proportion of such spending is devoted to basic research and research for the public good. We will increase government spending on education, ensure nation-wide access to nine-year compulsory education, and improve access to secondary education. We will take significant steps to promote vocational training and improve access to higher education. We will draw on Germany’s experience of vocational education and attach more importance to training of skilled workers. To this end, a considerable part of Chinese universities providing general higher education will be transformed to vocational ones. Third, we should deepen reforms of the systems for science, technology, and education and the administration system for scientific research. Aiming at functional transformation, we should carry forward with reforms of the government’s administration system for science and technology and continue to deepen reforms of research institutions. We must put an end to administrative tendency in scientific research and education systems, remove all systemic and institutional barriers to innovation, and promote de-administration to get over the obsession with administrative rankings in the field of scientific research. We need to develop incentive and assessment systems that encourage research and remove non-academic factors such as preference of superiors in evaluation of research achievements. We should strengthen academic

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norms and promote competition for priority to facilitate the creation of an independent and self-disciplined scientific community. We will strive to eradicate rash actions in the field of scientific research, and work hard to create a flexible and lenient environment that encourages innovation and convention-breaking. We will introduce reforms in the higher education system, abolish administrative rankings of the management of universities and improve the principal accountability system under the leadership of the CPC committee. The reforms, which replace administrative personnel with academic and teaching authorities, will enable experts to play an active role in management of universities. We will reform the exam-oriented education system in China, and attach great importance to well-rounded education, especially to improving people’s scientific literacy. We will revise relevant laws and regulations and implement more proactive policies to attract innovators. We will improve our talent selection system to encourage the development of innovators and inspire their motivation for innovation. We will pool talents from across the world and put them to the best use to develop large human resources who are innovative and ready to take risks. Fourth, we must allow enterprises to take a principal position in technological innovation and put an end to separation between scientific research and economic development. The government is not directly involved in competitive technological innovation, but provides support and environment to facilitate enterprise’s technological innovation. Risks and benefits are shared between the government and enterprises and between enterprises and universities via joint development mechanisms for major research programs and key technologies. The government promotes collaboration between enterprises, research institutes and universities to establish a long-term mechanism for smooth application of innovations of universities and research institutes in enterprises. The government encourages the development of venture capital to make financing easier for innovative enterprises. Public services platform for technological innovation are established and improved to facilitate the application of new technologies in SMEs and improve the environment for their start-up and development. The government supports pre-competition R&D for key technologies. Innovative enterprises enjoy preferential policies in many areas such as tax, pricing, direct subsidies, interest-subsidized loans, government procurement, and so on. Enterprises with core technologies are encouraged to get listed on stock exchanges. Via excess of returns on innovation, non-governmental capital and other economic resources are directed to innovation activities. Fifth, we must improve the innovation management system based on integration of innovation resources. We must integrate the resources of existing research programs and establish a mechanism for decision-making and coordination to prevent multiple administrators, repetitive research and discrete investment. For better use of research findings and relevant data and greater input–output efficiency of the country and the public, the results of scientific research programs funded by the government shall be open to the public as is appropriate. We will design a plan for reform of the management of government spending on science and technology, and establish a trans-department third-party evaluation mechanism to improve the performance evaluation of innovation.

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Sixth, we will implement the national strategy of intellectual property rights. We encourage creation and use of intellectual property. We will strengthen the coordination between intellectual property systems and other policies in areas such as the industry, science and technology, trade and so on. We will strengthen IPR protection by administrative and judicial means. We will speed up improvement of the national standards system and eliminate outdated standards. We will prioritize technical standards with proprietary intellectual property, and contribute proactively to formulation of international standards.

Chapter 5

Regional Coordination Under the New Normal

The new leadership of China has developed a new understanding of regional economic development and adopted a new approach in this regard. This is based on their profound understanding of China’s regional economic development and the characteristics thereof, and review of the CPC’s experience in development and governance of China. A lot of strategic initiatives and measures are put forward and implemented in a short period of time. Examples include the initiatives of building the Silk Road Economic Belt and the 21st Century Maritime Silk Road, the coordinated development plan of the Beijing-Tianjin-Hebei region, building of the Yangtze River Economic Belt and the China (Shanghai) Pilot Free Trade Zone. These initiatives and measures have enriched the traditional theories and practices about regional economic development and the new system for an open economy. They embody the strategic thought of development through interaction and coordination between China and the international community. Such initiatives and strategies, aiming at interaction and coordination between China and the rest of the world, are implemented across the country, including inland, coastal and border regions, and promoted in other countries as well. The underlying principle is to cross administrative divisions and even national borders to promote coordination between regions in China and coordination between China and other countries through interaction between China and the international community and coordinated development between regions in China. Regional economic cooperation between cities, provinces and even countries will enable the flow and combination of the factors of production in a broader scope of areas. So far, the most prominent feature of China’s regional economic development under the new normal is pursuit of development by interaction and coordination between regions in China and between China and the rest of the world.

© Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_5

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5.1 Promote Coordinated Regional Development, and Improve the National Distribution of Productive Forces 5.1.1 Goals of Coordinated Regional Development and National Distribution of Productive Forces in the New Era 5.1.1.1

Goals of Coordinated Regional Development and Distribution of Productive Forces

Since 1949, China’s understanding of coordinated regional development has been constantly evolving. Coordination between regional development is a dynamic process. Regions, while following national zoning plans, develop their comparative edges according to the rules of the market. We should boost free flow of the factors of production, encourage constructive interaction between regions and narrow the gaps between regions to create a new pattern featuring mutual reinforcement, complementarity and common development. Coordinated regional development concerns not only the factors of production, but also the people’s livelihood, the environment, sound interaction between economy, society and environment, and sustainable development. In national distribution of productive forces, the regional distribution and allocation of factors of production is optimized through overall planning of major infrastructure and industrial development nationwide in view of the international and domestic situations in different stages of development. At present, improving the national distribution of productive forces is a key task and an important measure for coordination between regional economic development. The national distribution of productive forces is an indicator, and an integral part, of coordination between regional development. We can find numerous illustrations showing that China’s understanding of coordinated regional development has been constantly improving and moving from the general to the specific. This trend is shown in the evolution of policies from properly handling the relationship between coastal areas and inland areas in the early days to Third-Front construction afterwards, and from expansion of opening-up from coastal areas to areas along the Yangtze River and borders. During recent years, China has paid more attention to development of specific areas by design and implementation of the overall strategy for regional development focusing on the west, the northeast, the central region, and the eastern region, and the strategy for functional zoning. The central government has also put forward other initiatives such as revitalizing the Yangtze River waterway, accelerating development planning for Bohai Rim to foster new growth poles, building the Silk Road Economic Belt and so on.

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A New Understanding of Coordinated Regional Development and National Distribution of Productive Forces in the New Era

For upgrade of China’s economy, we must have a new understanding of coordination between regions and national distribution of productive forces. First, we should combine our efforts to improve coordination between regional development and national distribution of productive forces with the efforts to enhance China’s economic competitiveness in the world, and focus on structural adjustment of regions in pursuit of economic transformation and upgrade. Second, we must improve the systems for coordinated regional development and remove all systemic and institutional barriers to regional interaction and development to give full play to the advantages of our systems. Third, at some stage of economic development, we should implement the strategy for balanced economic development between regions to promote their coordination and development of the central and western regions. For a long period to come, this strategy will provide ample space for China to maneuver for steady and fast development. Fourth, for coordinated regional development, we must implement the strategy for functional zoning and improve the distribution of productive forces according to comparative advantages and environmental capacity of regions. We should gradually shift our focus from economic indicators to comprehensive ecological protection, people’s lives and so on, and establish a new performance evaluation system that can boost the coordinated development between regions. Fifth, we should attach greater importance to sub-regional development, especially economic belts connected by rivers, lakes, bays and transport systems. The previous division of China into four regions, i.e., the east, the west, the central region and the northeast, can no longer meet the requirement of economic and social development. We must develop more specific and targeted policies for coordinated regional development and establish a targeted mechanism for development of sub-regions.

5.1.2 Current Conditions and Problems in China’s Pursuit of Coordinated Regional Development 5.1.2.1

Current Conditions

First, we have seen some achievements of the strategy for regional development, and a pattern of coordinated regional development featuring their constructive interaction is taking shape. The master strategy for regional development and the strategy for functional zoning are constantly improved, which has contributed to improvement of the regional pattern. So far, China has established several close-knit economic circles and belts that can provide strong impetus to development of other regions, such as the Pearl River Delta, the Yangtze River Delta and Bohai Rim. Some new growth

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poles have emerged and provided driving forces for coordinated regional development, including the Shanxi-Shaanxi-Henan Yellow River Golden Triangle, the Chengdu-Chongqing economic circle, the Beibu Gulf Economic Zone, the Central Plains Economic Zone, the Guanzhong-Tianshui Economic Zone and so on. With implementation of strategies for regional development, such as large-scale development of the western region, measures to energize the central region and reinvigorate the old industrial bases in the northeast region, the central and western regions no longer lag behind the eastern region in economic growth. In 2007, the economic growth rate of the western region exceeded that of the eastern region for the first time. From 2008 to 2012, the main indicators of development of the central, western and northeastern regions were higher than the national average, indicating that a pattern of regional development featuring distinctive characteristics of regions and constructive interaction is taking shape. Second, the public finance system and policy framework for coordinated regional development are constantly improved. So is the sharing mechanism of basic public services. As the reform and opening-up policy was first implemented, the government followed the global economic trend at that time and gave preferences to the eastern region. This helped the eastern region leverage their geographical advantages and rise, which boosted the national economic growth. In the first decade or so of the twentyfirst century, strategies for regional development were implemented to develop the western region, energize the central region and reinvigorate the northeast, which has effectively narrowed the development gaps between regions. The government expenditure per capita in the central region was 53.7% of that in the eastern region in 2005. In 2011, the figure climbed to 73.5%. In the same period, the figure rose from 69.7% to 103.7% for the western region, and from 97.8 to 111.3% for the northeastern region. Third, the central and western regions have shown some unique features in development, and the eastern region continues to play a leading role. New approaches have been adopted to pursue development and growth in the central and western regions. First, new progresses are achieved in expanding opening-up. The central and western regions have made great efforts to develop access to the sea and attract foreign capital, technologies and talents. Via airlines and high-speed railways, they proactively promote the development of an open economy, which has contributed significantly to the internationalization of these regions. Second, new and more practical ways are adopted to promote urbanization. Cities in some regions support each other in development. Connected by expressways, they have achieved coordinated development in housing, daily life and employment without running into problems that have frequently arisen in development of cities. Third, they have been exploring new, effective ways to promote the new type of urbanization, according to which rural residents are transformed to urban residents of local towns and cities. Meanwhile, the eastern region continues to play a leading role in economic development. The service industry in the east has been gathering pace. Its share in the regional GDP rose from 40.55% in 2005 to 44.86% in 2011, which laid a foundation for nationwide industrial transformation and upgrading. Such development will enable the eastern region to be a leading player in the country’s transition to “Created in China”, and

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further leverage the strengths of coastal areas to stimulate the economic development of inland areas.

5.1.2.2

Main Problems in China’s Pursuit of Coordinated Regional Development

First, we need to improve the cooperative mechanisms for promotion of coordinated regional development. Actions should be taken to address the following problems. First, without fiscal and taxation systems that promote coordinated development between regions and ecological compensation mechanisms, regions do not coordinate or cooperate with each other in development planning, infrastructure construction, industrial development and other areas. Second, there are so-called “glass doors”, “swing doors” and “revolving doors” in policy implementation in some industries and fields. Regional blockades, fragmentation of the market and destructive competition remain serious problems. All these have damaged the national interest. Third, due to deficiencies in systems for household registration, social security, essential public services and so on, the factors of production, especially labor, cannot move freely between regions, diminishing the efficiency of resource allocation. Second, we must allow market forces to play a more important role in national distribution of productive forces. Currently, local governments are only concerned about development of the division under their administration. Government intervention is excessive, while the role of market forces is yet to be improved. Development of regions and industries are unbalanced. Redundant development remains a serious concern, as shown in two aspects. The first problem is structural convergence. Many regions have chosen to develop new energy, steel and iron, automobile and heavy chemical industries as their pillar industries. Regions duplicate the industrial structure and approach to urban development of others, and do not show any distinctive features. Another problem is convergence of approaches. Establishment of economic and technological development zones and high-tech development zones are important ways for local governments to promote industrial concentration. But such development zones with no significant differences in functions and industrial planning constitute redundant development and lead to serious overcapacity in some industries. If we do not introduce regulation and provide guidance timely, we will miss the historical opportunity to promote coordinated development between regions. Third, we need to coordinate the distribution of productive forces with functional zoning. Due to many reasons, including lack of sound systems for coordination of regional planning, poor implementation of environmental protection policies and obsession with political achievements, the distribution of productive forces does not match the environmental capacity in some regions. Some regions with high carrying capacity of ecological environment do not have a heavy concentration of the factors of production, and their economy is not vigorous enough. On the other hand, some regions have been in overexploitation beyond their low carrying capacity of ecological environment. The mismatch between regional distribution of productive forces and the carrying capacity of ecological environment have led to low efficiency

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in allocation of resources and factors, and caused traffic jam, environmental pollution, ecological deterioration and other problems. It also resulted in other regional or urban maladies such as excessively high cost of infrastructure construction and business operation. We have noticed such mismatch in both inter-regional and intraregional development. Fourth, we must further specify the economic policies for the western region, the central region, the northeastern region and the eastern region. In terms of the areas covered by these four regions, such division is still too general. The areas concerned have significant differences in natural endowment, industrial structure, economic performance and many other aspects. The Chinese government has introduced an array of plans and policies for regional development which are targeted, pragmatic and practical. But the cooperation, division of labor and coordinated development between regions and in the regions are impeded by many disadvantages. One is that the scattered city clusters and industrial clusters surrounding major rivers and transport routes, which are supposed to support the coordinated regional development, have been developing slowly, and do not have strong competitiveness. Another disadvantage is that administrative division have major adverse impact on city and industrial clusters covering more than one administrative divisions. Fifth, we should further unleash the potential of the central and western regions to provide ample space for China’s steady economic development in the medium and long term. Currently, there is a wide gap between the east and the central and western regions in transport infrastructure. Generally speaking, the eastern region has sufficient infrastructure to support its economic development, and the central region is now catching up. The western region, however, lags far behind in infrastructure construction, which has severely restricted its economic development. Meanwhile, the existing preferential policies for the central, western and northeastern regions cannot provide enough support to them as they receive transfer of laborintensive, environmental-friendly industries, exploit water, light, wind and other natural resources, and process and convert energy and resources at or near places where they are exploited. We must accelerate development of differentiated economic policies. In addition, as a result of unbalanced opening-up between regions and phased opening-up of different regions since introduction of the reform and openingup policy, the central, western and northeastern regions lag behind others in opening up to the outside world. We must speed up efforts to open to the west and the north, and create new leading forces in opening up in these regions.

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5.1.3 New Situations and Features of Coordinated Regional Development 5.1.3.1

New Situations for China’s Efforts at Improved Coordination Between Regional Development and Distribution of Productive Forces

First, upgrade of China’s economy is a new objective for promoting coordinated regional development and optimizing the national distribution of productive forces. After over thirty years of rapid growth, China’s economy is facing dramatic changes in both internal and external environments. In China, economy development is under growing constraint of resources, energy and the environment, and the extensive model of development with heavy dependence on investment and factors of production cannot sustain. Meanwhile, due to the global financial crisis and the European debt crisis and their aftereffects, China’s foreign market has been sluggish, creating challenges to its model of growth with excessive dependence on export. International experience shows that when a developing country becomes a middle-income one, there tends to be an outbreak of social conflicts in the country, and its economic growth might slow down and even stagnate. As China’s per capita GDP exceeded 7,500 US dollars in 2014, we are now at a critical time to ward off the “middle-income trap”. To this end, we must be wise and brave to upgrade China’s economy, which raises a new requirement for coordinated regional development and improvement of national distribution of productive forces. Second, the world economy is undergoing profound adjustments, which creates new challenges for China’s efforts at coordination of regional economic development and improvement of distribution of productive forces. As the world economy is undergoing profound changes, the road to overall recovery has been a rough one, with ups and downs. The sluggish world economy has adverse impact on China’s economy which relies heavily on export. Coastal areas in the east, Jiangsu and Zhejiang, with a high level of export-oriented economy, are facing especially great challenges. Global trade growth is slowing down. Trade protectionism of various forms is rising. New trade barriers are disguised and tend to be perpetuated. All these have caused difficulties to China’s export. Most severely impacted are the photovoltaic, automobile, telecommunication, wind power and household appliances industries. According to statistics of the Ministry of Commerce of the People’s Republic of China, in 2012, China was the subject of seventy-seven trade remedy investigations initiated by twenty-one countries, involving a total sum of US$ 27.7 billion, up by 369% from the previous year. Other factors such as large-scale injection of liquidity and government budget deficits of the US and developed countries in Europe also have significant influences on China’s economy. As the world economy is undergoing constant changes, China’s economy, which has been growing rapidly over the past three decades, is facing dramatic changes in external environment. Its existing pattern for coordination between regional economy and distribution of productive forces are under pressure and call for adjustments.

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Third, the new global industrial restructuring provides new opportunities for China to improve the coordination between regional economic development and distribution of productive forces. Technologies such as information communications technology, robot technology, new energy, artificial intelligence, 3D printing and new types of material have led to a new round of technological and industrial revolutions. We must combine our efforts at improvement of the coordination between regional economic development and distribution of productive forces with the global industrial restructuring. We should keep abreast of the global science and technology achievements and development trends of emerging industries. We should give full play to advantages in factor endowments of regions to develop a number of industries of strategic importance. We must take advantage of the new round of industrial transfer to promote coordinated regional development, narrow the gaps between regions and put an end to redundant construction in industrial development. Fourth, the new type of urbanization has raised new requirements for China’s efforts at improved coordination between regional economic development and distribution of productive forces. The new type of urbanization is people-centered. We will take steps in an orderly manner to grant permanent urban residency to people who have moved from rural to urban areas. The pace of China’s urbanization rate will speed up in the following ten to fifteen years. We must pay particular attention to granting permanent urban residency to the existing over 200 million migrants and 300 million people who will move from rural to urban areas. Following the central government’s overall plan for reform of the urban household registration system, China will cancel all limits on household registration in small towns and cities, gradually remove the household registration restrictions in medium-sized cities, relax such restrictions in large cities and improve household registration policies for megacities. Considering such reform, the development of city clusters and urban systems will have significant influences on future transfer, distribution and development of industries and construction of major infrastructure. Fifth, cutting overcapacity is a new task for China in pursuit of coordinated development of regions and improved distribution of productive forces. The problem of overcapacity is found in a broad range of industries in China, involving a huge excess of overcapacity, with far-reaching effects, which is unprecedented in the history of the People’s Republic of China. In a sense, the current overcapacity in China is caused by destructive competition between regions and redundant industrial development over the years. So, in the coming period, a pivotal measure to address overcapacity in China is to promote coordinated regional development and improve the national distribution of productive forces. In addressing overcapacity, we must follow the central government’s strategic plans to absorb, transfer, integrate and phase out capacity as is appropriate, and establish a better mechanism for coordinated regional development. Cutting overcapacity is both a great opportunity and a daunting challenge.

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New Features of Coordinated Regional Development and Distribution of Productive Forces

First, the market mechanism is playing an increasingly big role in coordinated regional economic development. As China is still working to improve the market economy, local administrative authorities play an important role in flow and allocation of the factors of production. Local governments’ obsession with maximum profits and political achievements within their respective administrative divisions causes administrative barriers and destructive competition between administrative divisions, which leads to overcapacity and other problems, and impedes economic transformation. In recent years, thanks to implementation of the overall strategy for regional development and promotion of coordinated regional development, market forces are playing an increasingly big role in coordination of regional economies. We have gone beyond administrative divisions in integration of regions. In areas with a high level of regional economic integration, such as the Yangtze River Delta, the Pearl River Delta and the Bohai Rim, have the most immediate need to cast off the shackles of administrative division. The Regional Plan for the Yangtze River Delta approved by the State Council in 2010 is an attempt to break down administrative barriers. The planning for industrial development, infrastructure construction and other work in Shanghai, Jiangsu and Zhejiang are unified to promote the flow of the factors of production between regions, improve intraregional cooperation and enhance the economic competitiveness of these regions. China has also made other attempts in this regard, such as the Changsha-Zhuzhou-Xiangtan city cluster, Wuhan 1 + 8 city cluster, Zhengzhou-Kaifeng integration, Chengdu-Chongqing Economic Zone and so on. Measures have been taken in the fields of transport, communications, finance and so on to promote the integrated development of cities and regional economic integration. Second, a pattern of sub-regional economic development featuring open international cooperation is taking shape. In recent years, China has been making efforts to promote regional economic interaction among countries, and has accelerated the transformation and upgrading of opening-up in border areas. In 2008, China decided to develop Beibu Economic Zone of Guangxi province into a major zone for regional economic cooperation with Southeast Asian countries, the first of its kind. Then the State Council approved the Plan for Cooperative Development of the Tumen River Area in China in 2009, making the Tumen River area an important gateway of opening-up to Northeast Asian countries. In 2012, the State Council approved the implementation plans for three state-level key pilot zones for development and opening-up respectively in Manzhouli of Inner Mongolia, Dongxing of Guangxi province, and Ruili of Yunnan province. The Eighteenth National Congress of the CPC required that we must promote all-round improvements to China’s open economy, and improve regional and sub-regional opening-up and cooperation. Subregional cooperation has become an important component of China’s open economy, and a key measure to boost economic development in border areas. In a period to come, we should take further steps to facilitate customs clearance at ports and promote mutual investment. We will encourage coordinated development of relevant

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industrial parks and ports, and proactively promote the development of cross-border economic cooperation zones. We should make full use of domestic and international resources and markets, conduct mutually beneficial and win–win cooperation with neighboring countries, and improve our economic and trade relations with them. All these will help boost the economic development of China’s border areas, and contribute to building of a community with a shared future. Third, it is increasingly evident that the transfer of industries will enable the leapfrog development of regions. As a result of profound changes in international and domestic division of labor over the recent years, the transfer of industries from China’s eastern region to its central and western regions have sped up. The transfer is conducive to industrial transformation and upgrading and development of modern services and capital- and technology-intensive industries in the east. Meanwhile, it will quicken the new industrialization and urbanization in the central and western regions and help these regions achieve leapfrog economic development. To facilitate the transfer of industries from the Yangtze River Delta and the rise of the central region, the State Council approved the Plan for the Demonstration Zone for Accepting Relocated Industries in the Wanjiang City Belt in 2010. City clusters along the middle reaches of the Yangtze River, main components of which include the ChangshaZhuzhou-Xiangtan city cluster, city clusters around Poyang Lake, Wangjiang city belt, and Wuhan 1 + 8 city cluster, are planning for comprehensive integration of their industries, transport, markets and so on to create new economic growth poles. By proactively receiving industries relocated from the east, the Chengdu-Chongqing Economic Zone along the upper reaches of the Yangtze River has become a new engine of economic development in the west. Fourth, a “Greater China economic circle” in line with national strategies has emerged. Thanks to fast development of relationship between the mainland of China, Taiwan, Hong Kong SAR and Macau SAR, especially the conclusion of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the Economic Cooperation Framework Agreement (ECFA) and other economic cooperation agreements, a “Greater China economic circle” promoting economic partnership between the mainland of China, Taiwan, Hong Kong SAR and Macau SAR is taking shape. Hengqin of Guangdong province aims to establish a demonstration zone for exploration of new partnership between Guangdong, Hong Kong SAR and Macau SAR on the principle of “one country, two systems”. It will make use of resources for development from foreign countries, Hong Kong SAR and Macau SAR, and develop a focused area of industries in the region to facilitate the technological and structural upgrading of traditional industries in the Pearl River Delta and inland areas. Qianhai of Shenzhen, Guangdong province will promote the development of modern services and establish closer economic cooperation with Hong Kong SAR, aspiring to stimulate the upgrading of industrial structure in the Pearl River Delta with development of the modern service industry. The Western Taiwan Straits Economic Zone is a pilot zone for exchanges and cooperation across the Taiwan Straits. We will make it a leading platform for cross-Straits exchanges and cooperation, and strengthen its cooperation with Taiwan in economic development. The Pingtan Comprehensive Pilot Zone in Fujian province will be at the forefront of cross-Straits cooperation

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and pursue scientific development. Kunshan Pilot Zone for Deepening Cross-Straits Industrial Cooperation in Jiangsu province has attracted a large number of Taiwan businesspeople. It will give full play to such advantage to make the zone a vanguard in transformation and upgrading of cross-Straits industrial cooperation, and promote in-depth industrial cooperation across the Taiwan Straits. Fifth, a number of sub-regional growth poles with distinctive features have emerged in China’s eastern, central, western and northeastern regions. Thanks to targeted, pragmatic and practical plans and policies for regional development which are made in view of the specific conditions of different regions, we have seen quite a number of sub-regional growth poles with distinctive features and functions. The eastern region takes the lead in development. Qianhai, Shenzhen has made full use of its adjacency to Hong Kong and focused on development of the modern service industry. The China (Shanghai) Pilot Free Trade Zone, following the new trend of global trade development, will act as an “experimental field” for advancing reforms and improving the open economy and contribute to China’s economic upgrading. The Zhoushan Archipelago New Area, relying on its rich marine resources and other advantages, has become a leading player in development of marine economy. In the central region, the Wanjiang city belt has been accepting industries relocated from other regions, promoting Anhui’s participation in development and division of labor in the pan-Yangtze River Delta, and exploring new models for industrial relocation in the central and western regions. The Central Plains Economic Zone, with the Zhengzhou Metropolitan Circle as the center and supported by the Central Plain city cluster, will develop into a strategic anchor for coordinated regional development and a modern integrated transport hub. In the western region, Horgos, a city in Xinjiang, has leveraged its role as a gateway to Central Asian countries in construction of a modern free trade port on the new Eurasian Land Bridge. The GuanzhongTianshui Economic Zone, enjoying advantages such as a strong economic foundation, outstanding natural conditions, a long history and great potential for development, is making efforts to make itself a pace-setter in economic development and openingup in inland areas. Major national pilot zones for development and opening-up in Dongxing of Guangdong province, Ruili of Yunnan province and other regions serve as gateways for opening-up to and cooperation with ASEAN countries. In old industrial bases in the northeast, the Chang-Ji-Tu Pilot Zone for Development and Openingup has been promoting comprehensive cooperation with Northeastern Asian countries in development of the Tumen River area, and creating a pilot and demonstration zone for development and opening-up in border areas. Liaoning Coastal Economic Belt, with Liaoning playing a dominant role, and supported by the Bohai Rim, has made great efforts to foster new economic growth poles in the northern coastal area. Sixth, regional industrial agglomeration based on factor endowment is growing. Following the master strategy for regional development, China has taken a series of major strategic measures to facilitate large-scale development of the west, reinvigorate the old industrial bases in the northeast and other regions, energize the central region and encourage the eastern region to spearhead in development. As a result, industrial structure of these regions have been constantly adjusted and improved, and the industrial agglomeration based on local factor endowment is growing. Equipment

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manufacturing industry, modern service industry, electronic information industry, biomedical industry and so on are increasingly concentrated in economically developed coastal areas in the east. Processing of agricultural and animal husbandry products, energy and industries involving energy, chemicals, mineral resources and so on cluster in the central and western regions. Regional economic cooperation facilitates industrial agglomeration and leads to industrial systems with distinctive features. The Yangtze River Economic Zone mainly develops machinery, electronics, high-tech industries and other capital- and technology-intensive industries, so, there is a high level of concentration of machinery, automobile, computer, financial and business and trade service industries in the zone. The Bohai Rim Economic Zone prioritizes heavy chemical industry, equipment manufacturing industry and other capital-intensive industries, so, there is a high degree of agglomeration of steel and iron, machinery, automobile, petrochemical and micro-electronic industries. The Pearl River Delta, shifting its focus from labor-intensive industries to capital- and technology-intensive ones, has seen a higher degree of agglomeration of IC and communications equipment industries in addition to previous concentration of clothing, toy and household appliances industries.

5.1.4 Main Principles of Coordinated Regional Development 5.1.4.1

Combine the Roles of the Market and the Government

In a market economy, the market plays the main and decisive role in resource allocation. Therefore, we must give full play to the decisive role of the market in allocation of the factors of production. For free flow of the factors of production and optimal allocation of the factors, we must break down the administrative barriers between regions and avoid excessive government intervention. Meanwhile, the government should play an important role in promoting coordinated regional development. To ensure social fairness and justice, we must narrow the regional development gaps. This is the responsibility of the government. The government and the market have different advantages in promoting coordinated regional development. We must combine the roles of the market mechanism with the macro control of the government. Whiling allowing the market to play a dominant role, we should strengthen the government’s macro control.

5.1.4.2

Combine Reform with Opening-Up

The past three decades has proven that reform is the fundamental driving force for China’s rapid economic and social development. The rapid development of China’s economy, the remarkable “China miracle”, has been enabled by China’s institutional reforms. Currently, China faces many difficulties in reforms. In particular, our efforts at coordinated regional development are impeded because we have to deal with

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multiple parties. We need to further open up to the outside world to bring in external driving forces, so as to speed up the reforms in China. China has great space for further opening-up. The dividends of institutions unleashed from reform and opening-up remain strong impetus for China’s economic transformation and upgrading.

5.1.4.3

Combine Overall Planning with Prioritization

In pursuit of coordinated regional development, we must uphold the holistic approach. Meanwhile, we must focus on priorities to address major problems and conflicts that constrain regional development. We encourage regions of better conditions to develop and open up to the outside world to foster new growth poles. Meanwhile, we take measures to enhance the self-development capacity of underdeveloped regions and boost their development. Development of key regions can stimulate the development of surrounding areas, so it is a key task of overall importance. To give fully play to their role, we must strengthen the guidance on regional development, continue to deepen system and institutional reforms and speed up reforms and opening-up.

5.1.4.4

Combine Pursuit of Economic Growth with Improving people’s Lives

Economic growth and improvement of our people’s lives are closely linked and mutually reinforcing. Economic growth provides the material basis, and it is fundamental to improving people’s lives. Meanwhile, improvement of people’s lives leads to greater internal demand and stronger public enthusiasm for wealth creation, which drives and supports economic growth. We must combine our pursuit of economic growth with efforts at improving our people’s lives. Aiming at equal access to essential public services, we should take measures to narrow regional gaps in this regard. We must ensure that our people, wherever they are, have equal access to essential public services, and that the achievements of reforms and development are shared by everyone.

5.1.4.5

Combine Regional Coordination with Industry Relocation

China has a vast territory and a huge population, and the natural conditions vary from region to region. All these factors lead to unbalanced economic and social development between regions. An important way to promote coordinated regional economic development is to relocate industries from developed regions to under-developed ones. At the beginning of reform and opening-up, the Chinese government gave priority to development of the coastal region, which gave rise to heavy concentrations of industries and advanced technologies in the region. It also resulted in a fast-growing open economy in the region. While we are promoting coordinated

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regional development, we must give full play to the leading role of the coastal region with developed industries. We must strengthen the cooperation between developed regions and other regions, so as to stimulate the development of underdeveloped regions. To promote coordinated regional development, we should gradually relocate industries from developed coastal regions to the central and western regions. As the underdeveloped regions begin to catch up, there will be more competition in the market. In that case, we can improve the distribution of industries based on factor endowments of regions and encourage regions to seek development in view of their respective advantages and complementarity with other regions.

5.1.4.6

Combine Master Strategy with Regional Features

China has formed a master strategy for coordinated development of the east, the central and western regions and the northeast, and the strategy for functional zoning. In design of specific policies, we must consider the differences between regions in natural conditions and factor endowments such as the amount of energy and resources. Regions may set different goals and requirements and develop different policies in light of local conditions. Regional development policies, while following the state-level master strategy, must be made in consideration of local conditions and focus on differentiated development. Local governments should work out targeted, pragmatic and practical plans and policies for regional development in light of their local conditions to create regional economic growth poles with distinctive features and functions.

5.1.5 Policy Advice on Coordinated Regional Development and National Distribution of Productive Forces 5.1.5.1

Improve the Market-Oriented Mechanism for Regional Coordination According to National Plans

China needs to further deepen reforms and remove systemic and institutional barriers hindering coordinated regional development. We should seek transformation in three main aspects. First, regional coordination is currently based on administrative divisions and promoted by local administrative authorities alone. In the new marketoriented mechanism based on regions divided by level of economic development, local administrative authorities, supported by economic and social organizations, play a guiding role in regional coordination. Second, the government’s policies and plans should transform from general guidelines with no reference to specific regions to practical policies and measures that are designed in light of local conditions. Third, we should gradually change the practice promoting regional coordination mainly through the administrative system and administrative means. We should resort to

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economic and legal measures such as regional policies, plans, legislation and so on, and allow market forces to play a role.

5.1.5.2

Establish a Mechanism for Economic Development of Special Zones to Promote Development via Opening-Up

In addition to pilot projects of special economic cooperation zones such as crossborder economic cooperation zones and border economic zones, we should also push forward with development of pilot free trade zones. While opening up to the outside world to promote development, we must pay attention to development of open areas (such as bonded areas, ports and so on) in the central and western regions, so that they can participate in globalization. To establish a mechanism for economic development of special zones to promote development via opening-up, we must take the following actions. First, we should make every effort to promote pilot programs and reforms in areas such as fiscal and taxation policies, ways to attract foreign investments, investment and financing, administration systems and so on. Regional industrial policies and fiscal and taxation policies should be designed in light of local features. To leverage the advantages of preferential policies for special economic zones, we must innovate open mode and carry out early and pilot programs in these zones to attract advanced factors of production from home and abroad. They will serve as demonstrations and stimulate the development of surrounding areas. Second, we should proactively participate in international division of labor amid global economic integration and regional economic cooperation. In the process, we must integrate the “bring-in” and “go-global” strategies to make full use of domestic and international resources and markets for faster development. In the short term, we need to accelerate planning for development and opening-up of border areas. Meanwhile, we should develop the economic belt in the border area of Xinjiang and other gateways for opening-up to the west as parts of the New Silk Road Economic Belt. We should also speed up planning for infrastructure connectivity and building of the infrastructure in the Asia–Pacific region, and start preparations for establishment of the Asian Infrastructure Investment Bank.

5.1.5.3

Make Plans for Trans-Regional Economic Development to Create a New Landscape of Domestic Openness

For some time to come, we should focus on domestic openness in our work to expand openness. With better cooperation between regions and openness to each other, and coordination between regional administrative authorities, resources and factors will be distributed and efficiently utilized in a broader scope of areas. This will in turn promote the division of labor among regions in industrial development, establishment of regional open markets, ecological protection, construction of transport infrastructure and so on. In the short term, efforts should be made at trans-regional planning. The systems for water transport, highway transport, railway transport and maritime

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transport along the Yangtze River Economic Belt should be coordinated for higher transport efficiency. Taking advantage of the China (Shanghai) Pilot Free Trade Zone, we should coordinate the planning for industrial development and layout of provinces and cities along the Yangtze River and make the Yangtze River Economic Belt a new growth pole of China’s economy. We must speed up the planning for the Bohai Rim Economic Circle for coordination between the Liaodong Peninsula, Shandong Peninsula and the Beijing-Tianjin-Hebei region. The planning will also encompass Shanxi and Inner Mongolia and stimulate development of Henan and other provinces. It will boost the development of transport, energy routes and access to the sea in the region and foster new economic growth poles. Infrastructure connectivity is essential to economic cooperation inside the region. So, we suggest speeding up the planning for the Trans-Bohai-Strait Passageway and the construction thereof. The passageway is a major project of strategic importance that bears on development of the Bohai Rim Economic Circle. It may even have impacts on China’s steady economic growth, transformation and upgrading. More research should be started as soon as possible concerning the new mechanism for its planning and construction administration, major technological barriers, spending and so on. We should promote the development of the Dongting Lake Ecological Economic Zone, and speed up the relevant planning and construction. We should combine the water resources in the region with that of the Yangtze River, and integrate the construction of grain production base with industrialization, new urbanization and informationization to enable fast development in the region. The planning and building of the Huaihe River Economic Belt should be sped up as well. Taking advantage of the rising domestic need, the government should increase spending on management of the Huaihe River, infrastructure inside the region and agriculture and industry. We should make the Huaihe River Economic Belt a base of green agricultural products, a new type of base of energy and chemical industries and a new gateway to the sea.

5.1.5.4

Promote the Strategy of Coordinated Regional Development with City Clusters as the Central Source of Growth

First, for metropolises, we should implement the plan for national central cities to foster central growth poles and improve the quality of development in metropolises and their downtown. Second, we should promote the establishment of city clusters and give full play to the radiating and agglomerative effects of metropolises to boost the development of small and medium-sized cities. We must make efforts to expand the relevant economic belts and circles and city clusters and improve their quality to ensure the coordinated development between cities of different sizes and towns. Third, we must guard against blind expansion of city clusters. The enlargement of city clusters must be based on in-depth understanding of the stage and features of economic development, and proper spatial layout, integration of resources and layout of industries.

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Meanwhile, planning and construction of the Yangtze River Delta City Cluster should be started as soon as possible to create new economic growth poles. Construction of the Trans-Bohai-Strait Passageway will improve the logistic routes between the northeast and the coastal areas in the east and help integrate their economy. So, feasibility study and planning for the Trans-Bohai-Strait Passageway should also be launched at the earliest opportunity.

5.1.5.5

Improve the State-Level Planning and Guidance for Industrial Development

First, we must address the root causes of blind investment and redundant construction in regions. We should develop an information disclosure system for capacity utilization to guide expectations of industry investments, strengthen the administration of market access, and improve government’s macro regulation and guidance of industrial policies. Meanwhile, measures must be taken to improve industry concentration and mechanisms and polices for exit of enterprises, transform government’s functions and improve the evaluation of officials. We must curb local government’s blind investment and improper intervention in markets. Second, we must make state-level plans for industrial relocation. The central government must make strict guidelines for move up the industrial chain to the middle and upper reaches, high-end industries and trans-regional industrial relocation. Such guidelines must be planned and designed in advance. We should support enterprises of strategic importance, and design corresponding taxation, financial and human resource policies. Efforts should be made to improve the product level and technology content of major processed goods. China can pool its national economic capacity to improve its level of specialization and upgrade its industrial structure, thus fostering globally competitive clusters of strategic industries. Third, while promoting industrial relocation and coordinated regional development, we must give full play to the role of the market. We should speed up the development of the industries in which China enjoys comparative advantages, and promote the integration of supply chains to create a number of supply chain centers with multiple factors such as innovation, manufacturing, logistics, financial services and so on. Fourth, in some regions, we need to focus on fostering and development of new business forms and industries such as e-commerce, big data processing and so on, and industries that can stimulate consumption.

5.1.5.6

Establish a Mechanism for Cooperation in Trans-Regional Infrastructure Construction

Infrastructure, especially transport infrastructure, is essential and fundamental to constructive cooperation between regions. For example, the “two-hour economic circle” encompassing the four provinces of Hubei, Hunan, Zhejiang and Anhui is

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the core recipient of productive forces, and plays an important role in urbanization and economic development of this region. It has also enabled the development of city clusters in the middle and upper reaches of the Yangtze River. The “two-hour economic circle” has been enabled by a ring-shaped network of high-speed railways. Therefore, the government must improve infrastructure by measures such as transfer payments, interest-subsidized loans and financing by multiple sources. For key projects that require efforts of multiple sides, the government must proactively play a guiding role. Priorities should be given to construction of multimodal transport systems connecting cities. Such systems will strengthen the bonds between the eastern, central and western regions and serve as bridges. We must develop a modern industrial landscape based on resources and energy of the central and western regions, and promote the integrated development of cities in the east and in the central and western regions. We should improve the high-speed railway network in China, and establish hubs for multimodal transport by sea, inland waterways, railways, expressways and airplanes. We should also speed up the opening of airspace and the aviation market in China to facilitate the coordinated regional development.

5.1.5.7

Improve the Fiscal and Taxation Systems to Facilitate the Coordinated Regional Development

The essence of coordinated regional development is that all regions must bear in mind the overall national development. All regions should leverage their respective comparative advantages, and avoid overlapping industries and redundant construction. To this end, China must improve its fiscal and taxation systems. We need to introduce market-oriented reforms in major areas such as resource pricing, environmental and ecological compensation and so on. To facilitate the flow of labor, we must ensure equal access to essential public services, and establish incentive mechanisms in transfer payments and other areas that are more suitable for the spatial layout of China’s economy. Despite the rich energy in the central and western regions, due to price scissors for energy, the western region has not benefited much from the country’s development. Therefore, we must proactively advance reforms in the systems of resource taxes and fees and expand the pilot programs for resource taxes. We should replace the quantity-based tax for crude oil and natural gas with a pricebased one, and increase the taxation on crude oil and natural gas. Such measures will help conserve resources, improve the exploitation and use of resources and environmental protection, and contribute to sustainable economic and social development. Meanwhile, local governments of regions abundant in resources and energy will have more fiscal revenue. The regional gap will narrow accordingly. In addition, local governments of these regions will be able to improve their administration and local people’s lives, and provide better essential public services such as environmental protection.

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Ensure Equal Access to Essential Public Services

To narrow regional gaps in China, a key task is to narrow the regional gaps in public services and ensure equal access to essential public services. As equality in this regard is not only conducive to economic development, but also concerns social fairness, it is a main objective in China’s future efforts at coordinated regional development. We must ensure equal access to fiscal and financial policies and services and other public policies and services, and equal access to essential public services such as education, health and medical services, employment and so on. We must improve infrastructure such as water, power and gas supply, roads, and people’s housing conditions, and see that the achievements benefit all our people. While pursuing economic development, we must also pay attention to social benefits to promote equal access to basic public services across the country.

5.1.5.9

Establish and Improve the Mechanisms for Training and Employing Capable People to Promote Coordinated Regional Development

Human resources play a decisive role in pursuit of coordinated regional development and improvement of national distribution of productive forces. The key cause of slow development in underdevelopment regions of China is lack of talent. In view that these regions do not have any quality education resources or policies and environment to train or retain capable people, we must take immediate actions to rectify the situation. We suggest that the government should increase its spending on quality education resources in underdeveloped regions, and improve talent policies in these regions to help them attract and retain high-caliber talent. For example, we may improve the reward and support systems to encourage graduates of teachers’ colleges and those from the central and western regions to go or return to these regions to find employment.

5.1.5.10

Establish a Household Registration System that Facilitates Coordinated Regional Development

A system that ensures mobility of labor force between urban and rural areas and between regions is the institutional foundation for coordinated regional development. To this end, we must promote the residence certificate system and ensure equal access to basic public services. We must break down the barriers in the household registration system, guide the mobility of population according to carrying capacity of resources and the environment, and improve the national distribution of population in light of the strategies for functional zoning and coordinated regional development.

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5.2 A New Strategy for Regional Economy Featuring Interaction and Coordination Between Regions in China and Between China and the Rest of the World Since the Eighteenth National Congress of the CPC, General Secretary Xi Jinping has proposed many strategic initiatives and measures for regional economic development based on in-depth analysis and comprehensive planning for China’s reform, opening-up, development and stability. Examples include the initiatives of building the Silk Road Economic Belt and the 21st Century Maritime Silk Road, coordinated development plan of the Beijing-Tianjin-Hebei region, building of the China (Shanghai) Pilot Free Trade Zone and so on. These initiatives and measures have enriched the traditional theories and practices about regional economic development and a new system for an open economy. They embody the strategic thought of development through interaction and coordination between China and the international community. They reflect the new perception and approach to regional and even national economic development of the new CPC Central Committee headed by General Secretary Xi Jinping. Covering a broad scope of areas, these initiatives and measures are well-conceived, pragmatic and far-sighted. They will have far-reaching influence on development of China and even the world in the twenty-first century.

5.2.1 Jointly Build the Belt and Road to Build a Community with a Shared Future In a speech delivered at Kazakhstan’s Nazarbayev University on September 7th , 2013, General Secretary Xi Jinping proposed to build a Silk Road Economic Belt. To forge closer economic ties, deepen cooperation and expand development space in the Eurasian region, Xi Jinping proposed in the speech that we should take an innovative approach and jointly build a “Silk Road Economic Belt”. He suggested that we should take actions step by step to gradually form overall regional cooperation. According to him, we should improve policy communication, road connectivity, trade facilitation, monetary circulation and people-to-people exchanges in the region along the Silk Road. On October 3rd, 2013, in a speech at Indonesia’s parliament, Xi Jinping stated, “Southeast Asia has since ancient times been an important hub along the ancient Maritime Silk Road. China will strengthen maritime cooperation with ASEAN countries to make good use of the China-ASEAN Maritime Cooperation Fund set up by the Chinese government and vigorously develop maritime partnership in a joint effort to build the Maritime Silk Road of the 21st Century”. At the Third Plenary Session of the Eighteenth CPC Central Committee in November 2013 and the Central Economic Work Conference later that year, building of the Silk Road Economic Belt and the 21st Century Maritime Silk Road were adopted as major national strategies for development. They represent China’s efforts

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to expand development space to the west, i.e., the rest of Eurasia, and to the east through the ocean. The Silk Road Economic Belt and the 21st Century Maritime Silk Road are collectively referred to as the Belt and Road initiative. The land-based Silk Road Economic Belt and the sea-based Maritime Silk Road start from the west and the east of China respectively, and cover a broad scope of areas. Three land routes respectively runs from the northwest of China to the Atlantic Ocean through the Baltic Sea and the North Sea, from the northwest of China to the Mediterranean, the Persian Gulf and the Indian Ocean, and from the southwest of China to Southeast Asia and finally to the Indian Ocean. Three sea routes respectively run from China’s coast to the Atlantic Ocean through the Indian Ocean and the Mediterranean, from China’s coast to the South Pacific Ocean, and from China’s coast to the Arctic Ocean through the North Pacific Ocean. With these routes, the BRI will involve dozens of countries and billions of people in Asia, Europe and Africa. It is undoubtedly the longest and most vibrant international economic corridor with the greatest development potential in the world. The BRI is a major strategy introduced by China amid economic globalization to expand its convergence of interests with other countries and regions. It is an important measure to build a new system for an open economy, which promotes common development and prosperity of China and relevant countries and regions by sharing opportunities. It reflects China’s new ideas to promote global economic prosperity while honoring its commitment to global economic openness, freedom and cooperation. The initiative also represents a new approach to bringing benefits to other regions and stimulating economic integration of relevant regions in economic cooperation between China and other Asian countries. With a view to boosting global economy, the BRI will promote cooperation between China and other Asian countries, and inter-regional cooperation between China and countries in Europe and Africa. It is in conformity with China’s position of not seeking to establish exclusive regional economic organizations. Moreover, China does not confine itself to development by taking advantages of resources from the rest of the world. Instead, bearing in mind the long-term interest of the country, it seeks to build a community with a shared future by cooperation with countries along the Belt and Road. China will uphold the principles of market orientation and free trade, and continue to promote openness in the global market and free flow and growth of the factors of production. In other words, the BRI addresses not only China’s interests and demands, but also concerns of the countries along the Belt and Road. This is shown in three aspects. First, the initiative aims to create a community of shared interests. It seeks to improve the understanding of economic cooperation, promote sustainable development, shared interests and international upgrading and integration of industries, and facilitate reforms and transformation of countries with opening-up. Second, the initiative aims to create a community of shared responsibilities. Besides cooperation in traditional security issues, China will also promote international cooperation in non-traditional security issues such as information security, disasters, environmental protection, food security, public health, terrorism and so on, and improve its capacity

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to provide international public goods and services. Third, the initiative aims to create a community of shared emotions. In accordance with the principle of amity, sincerity, mutual benefit, and inclusiveness, China will strengthen people-to-people exchanges and reduce cultural conflicts with inclusiveness and respect to promote harmonious co-existence of different cultures. Upon construction of the above-mentioned community of shared interests, responsibilities and emotions, we will be able to achieve the BRI’s ultimate goal of building a community with a shared future. As President Xi Jinping put it, we must “interpret the Chinese Dream from the perspective of our neighbors and their aspirations for a better life and regional prosperity, and let a sense of common future take root”.

5.2.2 Upgrade Beijing-Tianjin-Hebei Coordinated Development as a National Strategy General Secretary Xi Jinping inspected Beijing on February 26th, 2014. Later, he emphasized at a symposium chaired by him that coordinated development of Beijing, Tianjin and Hebei is a major national strategy, and that steady efforts should be made to promote sustainable and coordinated development of Beijing, Tianjin and Hebei through complementarity and mutually beneficial and win–win cooperation. Xi Jinping raised specific requirements for Beijing-Tianjin-Hebei coordinated development in seven areas, namely planning for integrated development, promotion of coordinated development, enhancing industrial collaboration and connectivity, adjusting and optimizing the urban layout and spatial structure, strengthening cooperation in ecological and environmental protection, building systems of modern transport, and speeding up the integration of markets. General Secretary Xi Jinping has upgraded the Beijing-Tianjin-Hebei coordinated development as a national strategy, and shifted the focus of work from traditional integration to coordinated development. This is an illustration of the government’s unprecedented focus, determination and support for development of this region. This strategy is of great economic significance, because it will energize the BeijingTianjin-Hebei region and the Bohai Rim, and improve the allocation of resources in a broader scope of areas through coordination between regions. It aims to create a world-class mega-city clusters and make this region a real “third growth pole” in China. The strategy is also important for ecological protection. Measures will be taken to address smog and other environmental pollution issues, and other issues concerning people’s health and other interests. We will make this region the vanguard and demonstration of ecological protection in the country. In addition, the strategy is of great political and security significance. Integrated and coordinated development of Beijing, Tianjin and Hebei is fundamental to security of Beijing, the capital, in terms of politics, economy, environment, function and public security. It will eliminate many security concerns and uncertainties, and ensure efficient performance of the capital’s core functions.

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5.2.3 Encourage the China (Shanghai) Pilot Free Trade Zone to Conduct Bold Trials, Experiments and Reforms China (Shanghai) Pilot Free Trade Zone was a priority in China’s further reform and opening-up in the past year. General Secretary Xi Jinping has been closely following this project from the beginning. General Secretary Xi Jinping joined deliberation with deputies from Shanghai at the second session of the twelfth National People’s Congress on March 5, 2014. He emphasized that building a pilot free trade zone is a major measure proposed by the CPC Central Committee to deepen reform and opening-up under the new situation. Xi Jinping called on the country to grasp the prevailing international rules, speed up the establishment of basic institutions and regulatory systems that are consistent with them. We must enable the market to play the decisive role in resource allocation while letting the government better perform its functions. He encouraged the deputies from Shanghai to be bold to conduct trials, experiments and reforms. He also required them to explore new systems that can be replicated in other parts of China, especially systems for investment and trade facilitation, efficient and convenient regulation, sound legal environment and so on. As the China (Shanghai) Pilot Free Trade Zone is in the pipeline, many other places also apply for establishment of free trade zones. From the Bohai Rim, the Yangtze River Delta and the Pearl River Delta to the Beibu Bay, from the coastal area in the east to inland and border areas, many provinces, municipalities and autonomous regions leveraged their advantages, trying to take the lead in the competition for establishment of free trade zones. In 2014, three more pilot free trade zones were approved to be established in Tianjin, Fujian and Guangdong. Zhejiang, Shaanxi, Chongqing, Liaoning, Hebei, Henan, Shandong, Guangxi, Xinjiang and some other provinces, municipalities or autonomous regions are still making efforts in this regard. Local government’s enthusiasm about free trade zone reflects their aspiration for further decentralization and more benefits. They are eager to promote economic transformation and upgrading, opening-up and reform of the economic system with free trade zone.

5.2.4 Seek New Growth Drivers for Regional Development Through Comprehensive Opening-Up The above national strategies are implemented across the country, including inland, coastal and border areas, and promoted in other countries as well. The underlying principle is to cross administrative divisions and even national borders to promote coordination between regions in China and coordination between China and other countries through interaction between China and the international community and balanced development between regions. Regional economic planning may cover

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several cities, provinces and even countries. This will broaden the scope for flow and combination of the factors of production. According to the decision of the Third Plenary Session of the Eighteenth CPC Central Committee, we must promote domestic openness together with openness to the outside world, and better integrate the “bring-in” and “go-global” strategies; we must ensure the orderly and free flow of international and domestic factors of production, highly efficient allocation of resources and in-depth market integration, and foster new strengths at a faster pace so that we can participate in and lead international economic cooperation and competition. Besides economic objectives, China also hopes to improve the domestic landscape and its image in the world through the BRI. While promoting opening-up at a higher level in coastal regions, we should also promote openness in inland and border areas to expand opening-up in scope and depth. With these efforts, we will break new ground in opening-up featuring coordinated and mutually-reinforcing openness in coastal, inland and border areas, and win more space for development of the country in the long run. The initiative also reflects China’s generous spirit and sense of responsibility as a responsible major country and its determination to prosper and progress with the world economy. China is ready to cooperate with the countries along the Belt and Road, fulfill its responsibilities in creation of a new global landscape. The BRI is a good illustration of General Secretary Xi Jinping’s far-sighted thoughts on international economic relations, which is also development of his thoughts on regional economic development. Establishment of the China (Shanghai) Pilot Free Trade Zone is a key measure in implementation of the BRI. Its establishment conforms to the global economic and trade trends and China’s strategy of proactive opening-up. It shows that China still regards opening to the outside world as an impetus driving its new round of regional and even national development and reform and opening-up in the new era. The China (Shanghai) Pilot Free Trade Zone is set up as an experimental field for deepening economic reform and wider opening-up. It will explore practices that can be replicated nationwide, thus contributing to the overall development of the country. By building the free trade zone, China aims to drive innovation of institutions and reforms in China via opening-up, and enhance its international competitiveness. As for the coordinated development of Beijing-Tianjin-Hebei, it is more about regional coordination in China. Coordination in this region is not only the goal of a national strategy, but also absolutely necessary for dealing with multiple issues in this region. It involves environmental pollution control, urbanization, relocation of certain functions, especially non-capital functions of Beijing, and so on. China has taken this measure to foster new globally-competitive engines for regional growth in response to the slowdown in growth rate, adjustment of structure, and the impacts of previous stimulus policies. It is not a short-term policy, but a long-term national strategy. In addition to pursuit of development, the strategy also attaches great importance to significant, replicable institutional reforms. It will not only contribute to regional economic development, but also promote openness and political security and stability.

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5.2.5 Continue to Pursue Coordinated Regional Development Through Interaction and Coordination Between Regions in China and Between China and the International Community So far, China still has to deal with some problems in pursuit of coordinated regional development. For example, further efforts are required to improve the cooperative mechanism for coordinated regional development, the coordination with functional zoning, and the market-oriented distribution of productive forces. Meanwhile, we have not tapped the full potential for development of the central, western and northeastern regions. For coordinated regional economic development in the new era, we must take a holistic approach and consider it against the backdrop of global development. We must continue to pursue development through interaction and coordination with the international community. Actions should be taken in the following areas: First, we must focus on policy communication, road connectivity, trade facilitation, monetary circulation and people-to-people exchanges, and give priority to infrastructure connectivity. Combining firmness and flexibility, we must take a forward-looking approach, and attach importance to coordination with other countries. In particular, we should coordinate China’s interests with concerns of neighboring countries and relevant major countries, coordinate international strategies with those for regional development in China, pool resources and efforts of relevant authorities, sectors and local governments, coordinate the building of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and do a good work of neighborhood diplomacy. All these efforts will win China more space for strategic planning and maneuver. Second, we must deepen reforms in China. We must remove the systemic and institutional barriers to coordinated regional development, and improve the marketoriented mechanism for regional coordination guided by national planning. We should make plans for trans-regional economic development and create a new landscape of domestic openness to promote coordination between regions. We should facilitate the allocation and efficient use of resources in a broader scope of areas. We should promote the strategy for regional coordination in which city clusters serve as the core source of growth, and use city clusters as the core carriers of driving force for regional economic development. Third, while building pilot zones for special economic cooperation such as crossborder economic cooperation zones and border economic zones, we should also promote and improve pilot free trade zones. We should vigorously promote the development of ports in coastal and border regions and establishments of free trade parks (ports). We must promote development through opening-up, develop open areas that take the lead in international economic cooperation and competition, and foster leading areas of opening-up that drive regional development.

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Fourth, we must improve the state-level planning and guidance for industrial development and support enterprises of strategic importance to develop globallycompetitive industrial clusters of strategic significance. Efforts should also be made to establish a market-oriented cooperative mechanism for trans-regional infrastructure construction. Fifth, we must improve China’s population distribution, establish a household registration system that facilitates coordinated regional development, and develop and improve the mechanisms for training and employment of talents that are required in coordinated regional development. Sixth, we must improve the fiscal and taxation systems to facilitate the coordinated regional development, and introduce market-oriented reforms in major areas such as resource pricing, resource tax, environmental and ecological compensation and so on.

Chapter 6

Reform of Systems Under the New Normal

Reform is the fundamental source of impetus that increases the vitality of market entities and enables the steady and sound development of the economy and society. China’s reforms in the past two years after the Third Plenary Session of the Eighteenth CPC Central Committee, however, may be objectively evaluated as unsatisfactory. The reforms have encountered many obstacles. China is confronted with impediments and risks in some major areas of reform. Meanwhile, China is facing slowdown in economic growth, temporary pains of economic restructuring and the need to address the impacts of previous stimulus policies. All these have posed huge challenges. Accordingly, it is crucial to make coordinated efforts at major tasks such as advancing reforms and maintaining steady growth. While deepening reform comprehensively, we must consider the impact of each reform on the macroeconomy, and coordinate and prioritize the various tasks. Expansionary policies shall have priority over contractionary policies to minimize the negative impact of reform on the macroeconomy in the short term. The challenging tasks, which are also the objectives of our work, are to remove the systemic and institutional barriers to economic and social development, make coordinated efforts to advance reform, maintain steady growth, make structural adjustments, improve people’s living standards and guard against risks so as to deliver benefits of the reforms. We must make it a norm that in resource allocation, the market plays a decisive role and that the government plays its role better.

6.1 Major Theoretical Innovations of the Third Plenary Session of the Eighteenth CPC Central Committee Adopted at the Third Plenary Session of the Eighteenth CPC Central Committee, the “Decision of the CPC Central Committee on Some Major Issues Concerning Comprehensively Deepening the Reform” (hereinafter referred to as the Decision © Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_6

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in this chapter) contains many highlights, major breakthroughs, and steady steps and concrete measures to deepen the reform in China. With top-level design and practical measures, the Decision calls for efforts at both overall development and breakthroughs in key areas. With the Decision, the new central leadership of China drew a blueprint for governance of China in the ten years to come, which shows their resolution, courage and determination to continue to reform and open wider. The Decision also represents a consensus of the CPC and the general public in China on deepening the reform as the theme of the time and the right direction of development and their confidence in this regard.

6.1.1 For the First Time, the Decision Specifies the Overall Goal of Deepening the Reform Comprehensively, and the Timetable and Road Map for Achieving the Goal According to the Decision, the overall goal of continuing the reform comprehensively is to improve and develop socialism with Chinese characteristics, and to modernize the national governance system and capacity. By 2020, decisive results will have been achieved in the reform of important areas and crucial segments, and the reform tasks put forward in this Decision will have been completed. By 2020, China will have institutions and systems that are well-developed, systematically and rationally regulated, and effective, and ensure that all systems and institutions are working more properly and functioning well. A road map encompassing sixteen aspects and 60 measures is created in the Decision. This is the first time that the term “governance”, which connotes rule of law, instead of management or government, is used to describe the relationship between the state, the society and the people. It represents China’s goal of modernizing the systems, which is a theoretical innovation that enlarges the scope of modernization. Governance involves multiple actors including the government, markets, the people, social organizations and so on. It attaches great importance to unification of rights, responsibilities and interests, and places equal emphasis on efficiency and fairness. Use of the term “governance” in the Decision shows that the future governance of China will be based on more appropriate institutions and greater democracy, and become more institutionalized, standardized and procedure-based. The goal of China’s reform is now definite and specific, instead of something too abstract or general, such as building a moderately well-off society or rejuvenating the nation. Moreover, the term governance is widely used in the international community. Such theoretical innovation, i.e., modernization of governance, is reiterated or embodied in elaboration of specific reform tasks in the Decision. “Balanced macro control and effective governance are the intrinsic requirements for giving full play to the

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strength of the socialist market economy”. “Finance is the foundation and an important pillar of national governance.” “We must improve the mechanisms and institutions to form new relations between industry and agriculture and between urban and rural areas in which industry promotes agriculture, urban areas support rural development, agriculture and industry benefit each other, and there is integrated urban and rural development, so that the overwhelming majority of farmers can participate in the modernization process on an equal basis and share the fruits of modernization”.

6.1.2 The Decision Places Great Emphasis on Giving Full Play to the Catalytic Role of Economic Reforms With six “centering-ons”, the Third Plenary Session of the Eighteenth CPC Central Committee specified the focus of reform and presented a road map for the reforms of China’s economic, political, cultural, social, ecological and Party-building systems. “We must keep our focus on economic reforms, and give full play to their catalytic role”. This is an important conclusion and a breakthrough in theory of fundamental and general significance, which has clarified the focus and starting point for comprehensively continuing the reform to a deeper level. As shown in China’s reforms during the past thirty-right years, economic reforms have a significant and pervasive bearing on the reform of other fields. The tempo of progress in major economic reforms determines that of other reforms, playing a critical part in the whole situation. With targeted efforts to address relevant issues, the Third Plenary Session of the Eighteenth CPC Central Committee decided that in our pursuit of deepening reforms, we should focus on economic reforms and give full to their catalytic roles for other reforms. Among the fifteen reform tasks proposed in the Decision, six tasks are about economic reforms, and reform of the ecological system is also closely connected with economic reforms. Economic reforms, which account for nearly of the reform tasks in the Decision, are supposed to play a leading role. To deepen reform comprehensively, we must consider economic reforms as the strategic key area and focus in theories and practice. We must consider maintaining steady and sound economic development the top priority of the CPC and the government, so that we can unleash the vitality of the society and realize sustainable development through reforms.

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6.1.3 For the First Time, the Decision Requires That We Should Let the Market Play the Decisive Role in Allocating Resources and Let the Government Play Its Functions Better According to the Decision, “economic system reform is the focus of deepening the reform comprehensively. The underlying issue is how to strike a balance between the role of the government and that of the market, and let the market play the decisive role in allocating resources and let the government play its functions better”. It is only one word altered to change the market’s role in allocating resources from “basic” to “decisive”, but it has upgraded the role of the market. This conclusion is a major breakthrough in the CPC’s understanding of the relationship between the role of the market and that of the government, showing that China will continue with its market-oriented economic reforms. It demonstrates the CPC Central Committee’s determination to persevere with market-oriented reforms, and eases distrust and misgivings about China’s development path. The conclusion is a major highlight and the most important theoretical innovation of the Decision, which represents a significant breakthrough in understanding. The academia used to disagree on the advantages and disadvantages of regulation by market forces and government intervention. In practice, the market has played a basic role in promoting economic growth, while the government’s fiscal, financial and industrial policies and other macro control policies remain the decisive factors. The Third Plenary Session of the Eighteenth CPC Central Committee specified that the market should take the central position and play the decisive role in allocating resources. So, other factors may guide or affect the allocation of resources, but only the market should play the decisive role. The innovative idea of letting the market play the decisive role underlies the whole Decision. According to the Decision, “we must actively and in an orderly manner promote market-oriented reform in width and in depth, substantially reduce the government’s direct allocation of resources, and promote resources allocation according to market rules, market prices and market competition, so as to maximize the benefits and optimize the efficiency”. “Establishing a unified, open, competitive and orderly market system is the basis for the market to play a decisive role in allocation of resources”. We must improve “the mechanism whereby prices are mainly determined by the market. Any price that can be determined by the market must be left to the market, and the government is not to carry out improper interventions”. “We will improve the pricing mechanism for agricultural products, and attach importance to the market’s role in determining prices”. We should “give free rein to the market’s guiding role in technological research and development orientation, choice of paths, pricing of factors, and allocation of all innovation factors”, and “develop a mechanism within which the market plays a key part in determining innovation programs, allocation of funds, and assessing results”. “We will cancel all administrative approval procedures for economic activities under the effective regulation of the market mechanism”. As we can see from the above, by letting the market play

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the decisive role, the Decision has identified the starting point and central task of economic reforms in China and designed a road map for such reforms. Reforms of other areas must follow the same criteria.

6.1.4 For the First Time, the Decision Points Out That Both the Public and Non-public Sectors Are Important Components of the Socialist Market Economy, and Important Bases for China’s Economic and Social Development The Decision points out that both the public and non-public sectors are important components of the socialist market economy, and an important basis for China’s economic and social development. We must unswervingly consolidate and develop the public sector of the economy, and at the same time, unswervingly encourage, support and guide the development of the non-public sector of the economy. In another word, the Decision attaches equal importance to the public and non-public sectors of the economy. Though the “two unswervinglys” are about existing ownerships and basic economic system in China, in view of the current situation, the above conclusion is of great theoretical significance. It is a major breakthrough and innovation of the CPC in theories about the basic economic system. The Decision also points out for the first time that the property rights of both the public and the nonpublic sectors are inviolable. Such proclamation is a hailed by many people as beyond their expectations. It is an epoch-making milestone in China, a socialist country. It served as a reassurance for entrepreneurs who have been transferring their assets abroad or emigrating because of worries about China’s economic outlook and their life and property. The proclamation in the Decision by the CPC Central Committee will stimulate the vigor and creativity of the non-public sector of the economy, and encourage these entrepreneurs to continue to create wealth in China.

6.1.5 For the First Time, the Decision Points Out That Finance Is the Foundation and an Important Pillar of National Governance The Third Plenary Session of the Eighteenth CPC Central Committee attached great importance to the reform of the fiscal and taxation systems. The reform of the fiscal and taxation systems is correlated with the overall goal of deepening the reform comprehensively, i.e., modernizing the national governance. Finance is proclaimed as the foundation and an important pillar of national governance. An appropriate and transparent public finance system with effective budget constraints is vital for national governance. The wording of the Decision relating to the status of finance,

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i.e., the foundation and an important pillar of national governance, shows clearly the importance of the reform of the fiscal and taxation systems. It is foreseeable that the new round of reform of the fiscal and taxation systems which aims to establish good fiscal and taxation systems will play a more important role and become the focus in the overall efforts to deepen economic reforms. Reform and modernization of our fiscal and taxation systems will improve the macro control over public finance of the central government. It will also help local governments turn the corner. In another words, the new systems will mobilize the initiative of both the central and local governments. Therefore, it is a theoretical innovation to proclaim finance as the foundation and an important pillar of national governance.

6.1.6 For the First Time, the Decision Points Out That We Should Improve the Property Rights System for Natural Resources The proposal to improve the property rights system for natural resources is a major innovation and breakthrough in theories about ecological progress. The property rights system for natural resources plays a central role in the systems for resources conservation and consumption, and the establishment of an ecologically advanced system. In essence, it is an incentive mechanism that motivates relevant parties to protect and conserve natural resources with property rights. Reform of the property rights system for natural resources is prerequisite for market-oriented management of ecological and environmental protection. A major cause of the abuse of natural resources and ecological damage in China is the lack of market-based pricing for natural prices. Market-set price is fundamental to realizing the value of natural resources, and reform of the property rights system for natural resources is prerequisite for market-based pricing. Reform of the property rights system for natural resources is an important component of China’s institutionalized efforts for ecological progress. Without a property rights system for natural resources with clearly defined property rights, rights and responsibilities and effective oversight, or clear definition and strict protection of the property rights of natural resources, there is no guideline for distribution of benefits from natural resources among the central government, local governments, enterprises and individuals. It is also difficult to protect the property rights of natural resources.

6.2 Accelerate the Reform of the Fiscal and Taxation Systems Thanks to the tax distribution system reform initiated in 1994, China has established fiscal and taxation systems for development of the socialist market economy. These

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systems have improved the central government’s macro control of the fiscal system and enabled the steady growth of fiscal revenue. Though, due to some imperfections in the existing fiscal and taxation systems, there have been conflicts and problems implementation. These systems fail to satisfy the requirements of the improving market economy in China and need improvement. Since 2013, to promote the reform of the fiscal and taxation systems and strengthen the management of the debts of local governments, the central government has introduced an array of policies to, inter alia, improve the budget system, mitigate debt risks of local governments, promote the replacement of business tax with VAT and reforms of resources taxes. Reforms should be conducted in the fields of tax collection, expenditure, budgeting, oversight and so on.

6.2.1 Problems with China’s Fiscal and Taxation Systems China’s tax distribution system reform and reform of the taxation system have accomplished great achievements. But as the economy and the society are undergoing dramatic changes, the existing fiscal and taxation systems in China can no longer satisfy the requirements of implementing the scientific outlook on development, economic and social development and the people’s expectations. Management of government revenue and expenditure is not rationally regulated. The current fiscal and taxation systems mainly have the following problems. First, excessive fiscal revenue. Over the years, China’s fiscal revenue has been growing at a rate higher than its economic growth rate. The fiscal revenue is so high that it has constrained the growth of household income, and has an adverse effect on structural adjustment of national income distribution. In 2012, China’s government revenues, revenue from government-managed funds and the profits of SOEs respectively reached RMB 11,721 billion, RMB3,751.7 billion, and RMB2,195.6 billion. These revenues totaled 17,668.66 billion yuan, accounting for 34% of the GDP that year. The figure reached 29.7 trillion, 57 percent of the GDP in 2012, if we include the RMB12.1 trillion debts of local governments. According to a report issued by the Department of Economic Construction of the Ministry of Finance of the People’s Republic of China, Chinese enterprises bears a heavy burden of taxes and fees, including taxation, government-managed funds, relevant fees, social security payments and so on, resulting in a tax burden of about 40%. The excessive fiscal revenue has adverse effects on top-level design of policies for structural adjustment of national income distribution. Moreover, it may affect the market’s role in allocation of resources and lead to crowding-out effect on investment of enterprises. Second, unbalanced structure of fiscal revenue. China’s non-tax revenues account for 45% of its total government revenue. As for its tax revenue, direct taxes account for an excessively small proportion, and there is nearly no revenue from property taxes. Low resources taxes and environmental taxes do not match with the situation in the fields of resources, environmental protection and income distribution. Revenue from VAT, consumption tax and business tax account for a large proportion

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of China’s tax revenue, while income and property taxes make up a small proportion. The wide income gap between households calls for strengthened efforts to adjust taxes. But such efforts alone are not sufficient to transform the structure in which income and property taxes account for a small proportion of the total. For some taxes, the functions are not clearly defined, and policies are indefinite. For example, China levies VAT, consumption tax, vehicle purchase tax, and vehicle and vessel tax on automobiles. In addition to duplicated taxation, such practices also go against the national policies to encourage consumption of cars. In some areas, taxation is supposed to adjust income distribution, and promote the transformation of development model and economic restructuring. For example, taxation is supposed to play a role in containing the development of energy-intensive industries, high-pollutant products, excessive consumption and leveling income distribution. But these areas are not equipped with sufficient types of taxes. Overall the current taxation system in China does a good job of providing government revenues, but its performance in adjusting income distribution, promoting the transformation of development model and economic restructuring is unsatisfactory. Third, failure to give full play to the income-leveling function of the taxation system. Personal income tax is usually progressive. The taxes to be paid rise and decrease automatically along with the fluctuation of the economy between expansion and recession, thus adjusting the economic development. Currently, about 60% of the taxes in China are turnover taxes, while income taxes account for about 20% of the total, and personal income tax accounts for merely 10%. Due to excessively low proportion of personal income tax in the total and deficiencies of the systems for personal income tax and property taxes in China, its taxation system has not been able to give full play to the function of adjusting economic development. Fourth, inadequate transformation of government’s functions relating to fiscal revenue. Governments of all levels, especially the bulk of local governments, still prioritize increasing revenue by economic development, and public services are considered the second priority. Quite a few local governments are organizing and investing in competitive projects, while public services have long been constrained by significant funding gaps. This is especially the case for governments at the community level, which has led to severe problems. The governments at various levels have not stepped out of areas that lie outside their purview, and have failed to play their due role in some areas that require their efforts. There is no definite institution or regulation concerning the responsibilities of the government and the non-government sector for relevant expenditure. Some services which should be funded by the government, such as compulsory education, basic research, public health, basic medical care, social security, cultural programs and so on, have not received sufficient funds from the government. Some of these areas are even funded by the non-government sector. On the other hand, some local governments have been spending in areas which should have been funded by enterprises or the non-government sector, creating a heavy fiscal burden of the governments. Examples include the technological upgrade and capacity expansion of enterprises, transport facilities and other urban infrastructure and so on. Fifth, lack of clear division of responsibilities between the central and local governments. The State Council established the principles for division of powers

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between the central and local governments in the “Decision on Implementation of the Financial Management System based on Tax Distribution” in 1993, which were not implemented. The powers concerned include both the power to make decisions and the power to implement relevant decisions. Under the current system of government administration in China, the relevant decisions are generally made by central and provincial governments, and implemented by municipal and county governments. Following the principle that powers should commensurate with responsibilities, it is really difficult to clearly define the powers of governments of all levels. Consequently, the responsibilities of the central and local governments have remained indefinite, which has adverse impacts on the government’s performance of functions, and makes it difficult to evaluate whether the government has fulfilled its responsibilities. Sixth, unbalanced distribution of expenditure and funds between the provincial and municipal/county governments. The division of responsibilities between local governments of different levels is not appropriate. The provincial governments have great powers to decide the distribution of funds, while their fiscal revenues do not cover much items except for expenditure on performing their functions and macro control of the region under their administration. The expenditure on support for agriculture, education, public health, social security, urban and rural development, public security and so on is mainly borne by the municipal and county governments. Nonetheless, the municipal and county governments have limited funds available, and mainly rely on funds allocated by governments of higher levels. Such unbalanced division of fiscal powers and expenditure responsibilities between governments of different levels has led to a serious mismatch between the spending responsibilities and fiscal availability of primary-level governments. Seventh, lack of reliable indigenous source of revenue for local governments. The local governments in the central and western regions, especially areas inhabited by ethnic minorities, lack indigenous sources of revenue. They mainly rely on transfer payments from the central government for performance of functions. In some provinces in the western region, transfer payments from the central government accounts for 70% of the provincial government’s expenditure budget, while their own fiscal capacity can only deal with 30% of the total. For some county governments, transfer payments from governments of higher levels account for over 90% of their expenditure budget, and less than 10% is covered by their own fiscal capacity. The local government’s lack of reliable indigenous source of revenue has led to a serious mismatch between expenditure responsibilities and fiscal capacity. It has also caused many problems, such as local governments lobbying ministries for funding (known in Chinese as paobu qianjin), and heavy reliance on funding from governments of higher levels (known in Chinese as yaofan caizheng). Meanwhile, owing to the unbalanced system for local taxation, local taxes cannot yield considerable revenues. The revenues from local taxes makes up only a small proportion of the overall fiscal revenue from taxes. Moreover, the revenues from local taxes are significantly affected by changes in the central government’s tax policies and can be volatile. Local governments have a heavy dependence on extrabudgetary and extra-system funds. Many local governments have made considerable efforts to earn

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non-tax revenues so as to guarantee their performance of functions and to cover their expenditure. Eighth, deficiencies in the system for transfer payments. Transfer payments in China mainly consist of tax rebates and grants, fiscal transfer payments and special transfer payments. So far, there are still many deficiencies with the system for transfer payments. One problem is that tax rebates and grants, which are favorable to local governments, account for an excessively high proportion of the total transfer payments. On the other hand, general transfer payments, which aims at fiscal balance and equalization, accounts for a small proportion of the total. Economically developed regions naturally receive more tax rebates than their counterparts in other regions of China. But the wide gap between the proportion of tax rebates and grants and that of general transfer payments has negative impacts on the balanced economic development. As the tax rebates to local governments are growing, some economically backward areas have been lagging far behind in economic development and availability of public services. The structure of the system for transfer payments is unbalanced. Many special transfer payments require supporting funds from local governments, sometimes up to 70% of the total sum required. Such requirement for local governments with severe shortage of sources of revenues enlarges the discrepancy between the expenditure and revenues of local governments. The management of special transfer payments is expensive but inefficient. The special transfer payments in China each year reaches trillions of yuan, involving a substantial amount of work and many departments, from the central government to the provincial department of finance and then to the municipal or county bureau of finance. To win more special transfer payments, some primary-level government departments make great efforts in reports to governments at higher levels. Lack of transparency in project approval and funds distribution tends to cause corruption. Many special transfer payments are assigned late, some are even not assigned by the year end, leading to substantial carryover and idle funds at the year end. The departments concerned place much emphasis on distribution of special transfer payments, but fail to pay due attention to their management. As a result, there is no effective performance appraisal or oversight, which has undermined the effects of fiscal expenditure. Ninth, problems with the administration of tax collection, oversight and budgeting. Under the current administration system for finance and taxation, the administration personnel are guided by both financial authorities of higher levels and local governments. This has caused many problems. A major problem is that they do not have effective control or administration of the finance and taxation. Some even violate the relevant principles and disregard relevant laws and regulations. In addition, there is no effective mechanism for oversight and constraint in the current administration system for finance and taxation. Due to lack of sense of urgency and sense of responsibility, many finance and taxation administration personnel have violated the law or discipline. With the implementation of institutional reform in China, in some regions, a number of finance and taxation administration departments have reduced staff, or have been merged or even cancelled. This has in turn caused staff instability, lack of initiative at work, and unsatisfactory administration of finance and taxation. In many places, there are no dedicated departments, funds or personnel for

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administration of finance and taxation. Some local governments and departments fail to ensure transparency in government affairs and democratic management. An important task in Party building in the new era is to promote transparency in government affairs and democratic management and oversight. Financial transparency and democratic management of finance are crucial for fulfillment of this task. Many local governments and departments have established leading groups for democratic financial management, but most of the members of such groups are not elected, but nominated by heads of relevant departments. Such leading groups for democratic financial management cannot perform effective oversight. There are also problems with the budgetary systems. The budget comprehensiveness and transparency fall far short of public expectations, and the legislation and enforcement of budget laws shows lack of seriousness. These problems have prevented the National People’s Congress and the public from comprehensive oversight of the budgeting process, and undermined the government’s credibility, thus impeding the reform of the fiscal and taxation systems. Tenth, inadequate management of the debts of local governments. In recent years, local governments have developed a financing mechanism consisting of “land finance”, i.e., a strategy to generate revenues from transfer of land-use rights, and local financing platforms. While this mechanism has contributed significantly to the urban infrastructure construction, its negative impacts are also increasingly felt. Such revenues from financial disintermediation falls outside the purview of the budgetary systems, so, there is no sufficient public constraint on urban construction. This has inevitably led to waste, corruption and obsession with grandiose projects. Revenues from land sale is the foundation for local financing platforms. But the rising land and housing prices have led to sharp deterioration of income distribution. The highincome population has been buying homes for speculation or investment purposes, which increases the risk of social disintegration. Without unified system of statistical methods and indicators, the existing statistics about the debts of governments of all levels are neither exhaustive nor true to fact. Some local governments have been arbitrary in debt financing, and they are in debt to many different parties. Many debts of local governments are not included in the budgetary system, and there are no sufficient constraint or control over debts of local government in relevant laws and regulations. Most local governments have not established a mechanism for debt repayment. They fail to consider their solvency while borrowing money, leading to a situation where the government debts have gone far beyond their fiscal capacity.

6.2.2 Key Tasks in the Reform of the Fiscal and Taxation Systems Guided by the scientific outlook on development, we must promote the reform of the fiscal and taxation systems step by step to maintain the stability and continuity of the fiscal system. Based on the existing framework of systems, we should focus

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on addressing the issues that blur the roles of the market and the government. The objective of the reform is to enable the government to play its functions better in the market economy. The reform must be advanced in a transparent and standardized manner according to relevant procedures. First, transform the government’s functions to establish the public finance system. We must transform the functions of the fiscal system. We must shift its focus of work from boosting economic growth to balanced efforts to promote economic growth, address economic fluctuations, income distribution and pollution control and so on. Transformation of government functions is prerequisite for clear definition of the powers and the scope of financial expenditure of governments of all levels. In the market economy, we must clearly define the functions of the government. The government must refrain from interference in any matters that can be addressed by the market mechanism. Meanwhile, the government must proactively perform its functions in delivery of public services that are essential to the public. The government should neither overstep its bounds nor fail to play its due role. We must adjust the structure of financial expenditure, and accelerate the development of the public finance system. Following the principles that government expenditure should be for public good, market-oriented and play a guiding role, we should specify the scope of government expenditure and adjust the structure of financial expenditure. We must strengthen the financial support for key projects, and give priorities to agriculture, rural infrastructure construction, education, science and technology, public health, social securities and so on. The government will gradually reduce and ultimately stop its direct investment in general competitive fields, and invest in public services industries. Second, improve the distribution of financial resources and authority of office between the central and local governments. We must improve the financial relations between governments, and establish and improve the fiscal system that is compatible with authority of office. To improve the financial relations between governments, we must clearly define the responsibilities of fiscal expenditure of governments at all levels, and improve the systems for transfer payments from the central and provincial governments. The financial administration systems at the provincial and lower levels must be improved according to the principle that authority of office shall match with financial powers. The central government shall bear the responsibilities of expenditure on essential national public services and those for adjustment of income distribution. The local governments shall shoulder the responsibilities of expenditures on public services for regions within their purview. Responsibilities of expenditures on trans-regional public services shall be shared by the central and local governments, with clear division of primary and secondary responsibilities. Where conditions permit, the finance of county governments should be placed under direct supervision of provincial governments to reduce the tiers of financial administration for better administrative efficiency and efficiency in use of funds. Pilot fiscal reforms will be conducted at the township level to place the township finance under the supervision of county governments. Efforts should be made to clarify the distribution of financial resources between the central and local governments after the nationwide replacement of business tax with VAT. To make up for the consequent gap

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in financial capacity of local governments, we will adjust the ratio for VAT revenue sharing between the central and local governments to improve the distribution of such revenue. In determination of the appropriate ratio, in addition to the VAT paid by local enterprises, we must also take into consideration the size of permanent population in the region concerned and even the efforts at energy conservation and environmental protection of the local governments to reconstruct the development incentive mechanism for local governments. The expenditure responsibilities of the central government should be gradually clarified, and will increase according to externality, information complexity and incentive compatibility. Through such adjustment, ultimately, the central government will shoulder the expenditure responsibilities of the basic pension plans, and the provincial governments will cover the expenditure on the basic medical insurance. In areas such as justice, compulsory education for the children of migrant population, administration of food and drugs and environmental protection, we will moderately increase the expenditure responsibilities of the central and provincial governments and reinforce their intervention. Third, improve the system for transfer payments. In our efforts to reshape the transfer payments system, we should focus on cutting and restructuring transfer payments. Aiming to help the central and western regions deal with lack of financial resources, we will increase the scale of general transfer payments to these regions, and determine the appropriate scale of transfer payments to other regions. We must improve the structure of transfer payments and strictly control the scale of special transfer payments while scaling up general transfer payments and giving more financial support to counties and townships with financial difficulties. We must clarify the distribution criteria and procedure of transfer payments by legislation, which will enable the local governments to have stable expectations and prevent disruptions of their fiscal administration. We will give local governments more fiscal autonomy by making special transfer payments in installments based on the areas concerned and conducting post-audit. Fourth, establish a public investment and financing system primarily comprising municipal bonds. We should establish a public investment and financing system consisting of municipal bonds and policy-based finance. We must regulate the debts of local government, especially the financing platforms of local governments. The overall scale of local government bonds should be determined by the central government, but its issuance should be based on the market. We will launch a scheme to allow the joint issuance of local government bonds in the public market by provincial and county governments and the independent issuance of municipal bonds by municipal governments. We will continue to develop policy-based finance for infrastructure financing. When we have clarified the issues of government debts, we should make efforts to develop the systems for forestalling debts risks of local governments. Fifth, accelerate the establishment of a budgetary system that is well-conceived, well-regulated, comprehensive and transparent. The budgetary system is the foundation of the fiscal and taxation systems. A properly designed budgetary system is essential to a successful budget. We must uphold the rule of law and establish a budgetary system that is well-conceived, well-regulated, comprehensive and transparent. The distribution of budgetary powers and systems must be well conceived.

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The budgeting and implementation must be regulated by law. The budget reports must contain information about all revenue and expenditure of the government. We must ensure the transparency and comprehensiveness of the budget reports and compile the fiscal information in a manner that facilitates analysis and review. We will improve the coverage and depth of budget reports, and compile a comprehensive budget in addition to the existing public budgets, budgets for government-managed funds, budgets for state capital operations and social security. Local governments should be allowed to issue bonds and make their own budgets of capital and debts independently so as to strengthen the management of government investment. We should gradually promote the use of tax expenditure statement, build the medium-term budget framework, and compile government balance sheet to reflect the government’s fiscal capacity in terms of the outstanding debts. We must significantly enhance the budget transparency by taking measures step by step in areas concerned and addressing topical issues. In pursuit of law-based budget, we must take a well-conceived and prudent approach to law-making and ensure that the law is strictly enforced. We must improve the budget management capacity of the National People’s Congress and other relevant departments, and strengthen the post-project oversight of government expenditure by auditing departments and other departments while reducing pre-project approval. We must make great efforts to enhance the capacity of the auditing departments and give them more powers to ensure the compliance and performance of fiscal expenditure by auditing. This will help reduce pre-project approval of fiscal expenditure, improve the efficiency and forestall corruption. Sixth, raise the proportion of profits handed over by SOEs to the government to give better play to the levelling function of fiscal revenues. We should significantly raise the proportion of profits handed over by SOEs and include such profits into public finance. Part of such revenue should be spent on social security, and the remaining will be used to support the structural tax cuts in relevant fields. For structural tax cuts, we will focus on government administrative charges and governmentmanaged funds which should be cancelled or integrated into various taxes to cut the share of non-tax revenues significantly.

6.2.3 A New Round of Tax Reforms Finance is the foundation and an important pillar of national governance. Wellconceived fiscal and taxation systems are the institutional guarantee for improving resource allocation, maintaining market unity, promoting social equity, and realizing enduring peace and stability. Since the Third Plenary Session of the Eighteenth CPC Central Committee, China has not taken any substantive measures to reform its taxation system. In the coming years, we must make resolute efforts to advance the new round of tax reforms by introducing new types of taxes, tax cuts, and integration of taxes as is appropriate, and take new reform measures as soon as possible. In response to the economic development in China, we should gradually reduce the proportion of indirect taxes, and establish and improve a system for direct taxes,

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of which the taxation subjects are property and behavior of the residents. We must give full play to the functions of taxation in improving economic structure, clarifying economic relations, especially the relationship between the central and local governments, improving the quality of economy, curbing local government’s blind investment, reconciling social conflicts, and improving income distribution. This will further unleash the productive forces and be conducive to modernization of the national governance system and capacity. While introducing new types of taxes, we must place emphasis on the role of taxation in optimizing economic structure and improving the quality of economic development. We should establish and improve the system for property taxes, and initiate the legislation as soon as possible to create conditions for introduction of taxes. Coordinated efforts should be made to improve the tax administration capacity and the tax system. We should promote the real estate tax nationwide with tax exemption for self-used properties of given area. Real estate tax will ultimately become one of the major local taxes. To support the introduction of the real estate tax, we must establish a nationwide registration system of urban housing information. We should also further reform the resource taxes, and introduce price-based taxes on coal, crude ore of other non-metallic minerals, iron ore and so on. We will increase the rate of resource taxes and levy resource taxes on more resources such as water, forest, grassland, wetlands, mud-flats and so on to promote conservation of resources. To build an environment-friendly society, we will levy environmental protection tax on major pollutants such as water and air pollutants, solid waste and noise, and will gradually expand such tax to other major sources of pollution. We should also levy profit tax on monopoly enterprises and social security tax, the revenue from which will be incorporated into the social security funds. As for tax cuts, we must give full play to the role of taxation in income distribution, especially in primary distribution. We will make greater efforts on structural tax reduction, and moderately reduce the overall tax burden on enterprises and households, especially enterprises in the modern service industry, micro and small enterprises, and low-income population. We will reform the personal income tax system, increase the proportion of direct tax and improve its role in adjustment of income distribution. We will promote the development of the social credit system consisting of income report and property registration and so on. We will improve the system for personal income tax which combines taxation based on comprehensive income and income by category. We may consider raising the threshold for personal income tax to RMB5,000 in 2015 while increasing the taxation on high-income population to ensure social equity. Aiming at promoting unified taxation system, equality in tax burdens, and fair competition, we must review and regulate preferential tax policies disguised as regional or industrial policies. We will reduce the proportion of non-tax revenues and revenues from government-managed funds, cancel unreasonable and unregulated charges and government-managed funds, and reduce tax distortion by establishing an equitable taxation system. Meanwhile, we will continue to expand the replacement of business tax with VAT nationwide to all industries. We will deepen the VAT reform to establish a

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consumption-type VAT system. The VAT revenues should all go to the central government, rather than being shared between the central and local governments, to curb blind investment of the local governments. Meanwhile, to ensure nationwide equal access to basic public services, the central government should increase the general transfer payments to the local governments, and increase the expenditure on social security, compulsory education, public health and so on. To reduce duplicated taxation and promote the development of the service industry, especially modern services, we should steadily expand the taxation subjects of the VAT, and reduce other taxes including the business tax. We will improve the system for consumption tax and adjust its collection scope, procedures, type and rates. Considering that consumption tax is conducive to energy conservation, emission reduction and promoting rational buying, we will impose consumption tax on products that tend to cause environmental pollution or consume too much energy to give full play to its role. We will also improve the system for enterprise income tax to encourage innovation.

6.3 Deepen the Reform of the Financial System The risks in China are partly due to institutional deficiencies. For example, owing to lack of interest rate liberalization, Internet finance and shadow banks have seen rapid development. We must consider it an urgent and important task to deepen the reform of the financial system. The aims of the reform are to accelerate the establishment of a modern financial system that comprises different forms of ownership and different ways of operation and that features a reasonable structure, complete functions, efficiency and security, enhance the competitiveness of our banking, securities and insurance industries, promote the steady, sound development and security of our financial industry, and make greater contribution to the faster and sound development of the economy and society. The key to the financial reform is properly handling the relationship between the government and the market. We must allow the market to play a decisive role in resource allocation. We must let the market and the non-government sector to play their role.

6.3.1 Deepen the Reform of Financial Institutions, Break the Financial Monopoly, and Promote the Development of Rural Finance and Private Finance First, continue to deepen the reform of the banking industry by improving the modern corporate structure in the industry. After the Asian financial crisis in 1997, some large commercial banks in China, including the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, China Construction Bank and Bank of Communications, embarked on restructuring to joint-stock companies. We

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have seen some progress in the reform in the global financial crisis in 2008. The reform of large commercial banks, however, is not completed yet. We still need to deepen the reform of commercial banks in China in the following aspects. First, the new focus in the reform of the banking industry is transformation of the development model and restructuring. To this end, we must continue to improve the corporate governance structure of large commercial banks that have been restructured into joint-stock companies, and establish modern systems of financial enterprises in these banks. Meanwhile, we should improve the diverse system of financial institutions, especially by accelerating the development of financial institutions that provide services primarily for agriculture, rural areas and farmers, and small and micro enterprises. We must increase our financial support for weak areas, and make efforts to provide financial services in rural areas and make financing for small and micro enterprises easier. Second, we should continue to improve the counter-cyclical framework for macro-prudential management of the financial sector and enhance the ability of commercial banks to guard against risks. Third, we must improve the global competitiveness of our commercial banks by opening wider to the outside world. Fourth, we must accelerate the reforms in related areas to improve the environment for development of commercial banks. and speed up the interest rate liberalization. Second, establish a multi-tiered, wide-ranging and sustainable financial service system. The system should be oriented to the needs of agriculture, farmers and rural areas, and give full play to the functions of policy-based finance, commercial finance and collaborative finance. The Agricultural Bank of China must maintain and improve its branches and services in rural areas, and better conduct its mission of serving agriculture, farmers and rural areas. It should make full use of its advantages in capital, network and professionalism in counties to better serve the needs of agriculture, farmers and rural areas and county economies. The Agricultural Development Bank of China should continue with its internal reform to improve its functions and operation mechanisms. It should expand its non-commercial services and provide loans to more areas of the rural economy, such as production, processing and conversion of agricultural, forestry, animal husbandry, sideline production and fishery products and so on. The Postal Savings Bank of China should improve its systems and institutions, and leverage its advantages to encourage and promote the flow of savings to the rural area. Rural credit cooperatives must continue to deepen the reform and improve the system of property rights, forms of organization and mechanisms for internal control, better playing their role of the major player in the financial sector in the rural area. We must proactively promote the development of new types of rural financial institutions. We should adjust and release the restrictions on financial institutions in the rural area, and make vigorous efforts to facilitate the development of new types of rural financial institutions of various forms of ownership that mainly provide microcredit. Third, accelerate the development of private financial institutions. In reform of the financial sector, we must break the financial monopoly and establish an inclusive financial system. The most important components of the inclusive financial system are small and medium-sized banks, financial institutions, collaborative financial organizations and private finance. We encourage the participation of private

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capital in reorganization and transformation of small and medium-sized financial institutions and steady development of financial enterprises of all forms of ownership. This is a major policy adopted by the CPC Central Committee to support and encourage the development of the non-public sector and improve the socialist market economy. Accelerating the development of private financial institutions is of great significance to improving the financial services at the grassroots level. The financial sector is in essence a competitive industry, and competition is the fundamental approach to improving supplies and reasonable prices. After years of financial reform and development, the financing environment for large and medium-sized enterprises and cities in China has seen remarkable improvement. Rural areas and other areas at the primary level, however, are still confronted with inadequate supply of financial services. We must encourage and guide private capital to develop enterprises in the sector of community finance, and expand the application of new information technologies in financial services. We must improve the coordination between relevant parties and strengthen the supervision on financial institutions at the grassroots level. Meanwhile, we must accelerate the establishment of the system for deposit insurance to create a favorable environment for the development of private small and medium-sized financial institutions.

6.3.2 Accelerate the Development of a Multi-tiered Financial Market System First, vigorously develop the bond market. The top priority in the reform of the capital market is to vigorously develop the bond market, especially the government bond market. Government bond is firstly a kind of financial asset and secondly a financing instrument for the government. An extensive government bond market is essential for the sound development of the financial market. Issuance of more government bonds is also conducive to renminbi (RMB) internationalization. Local governments of economically developed regions may be allowed to issue local government bonds. To this end, the Budget Law must be revised, and the local government budget must be disclosed. This also provides an opportunity to reform the political system. For the short term, pilot programs for securitization of bank loans can be conducted to transform the best asset of banks to cash. Securitization of loans is capital injection to banks. For the capital market, securitization transforms savings institutions to bond holders in the bond market. Meanwhile, we should increase the scale of corporate bonds. We must vigorously develop corporate bonds, improve the management system and the market-based issuance mechanism for bonds, and the self-regulation mechanism for bond issuers. We will improve the review efficiency, and gradually permit more types of bonds. For steady expansion of the bond market, we must promote innovation and diversification of financial products, expand the asset securitization pilot, and promote financing instruments such as SME collective bonds. We should also encourage the development of private placement bonds and other

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financing instruments to expand financing channels. We must strengthen the coordination between departments supervising bonds issuance, raise the standards of information disclosure, and clarify the regulatory and supervision responsibilities of relevant departments. We must improve the infrastructure of the bond market, and promote coordinated development of the inter-bank market and the stock exchanges. Second, continue to improve the main board, the SME board, and the secondboard market. We should take steady steps to improve the corporate governance and transparency of public companies, and perfect the modern enterprise system. We will deepen the market-oriented reform of the mechanism for initial public offerings (IPO), further reducing the administrative approval procedure while reinforcing the constraint of capital, market and credit. We will improve the investment return system of public companies, encouraging them to increase cash dividends. We must improve the delisting system to ensure the constant improvement in the quality of listed companies. We will continue to promote the IPO of outstanding large-scale Chinese enterprises and high-growth SMEs, and take measures to encourage red chip companies and other companies from outside the mainland of China to get listed in the A-shares market so as to increase the proportion of shares in circulation of listed companies. For industrial restructuring and upgrading, we will push forward with the market-oriented comprehensive mergers and reorganizations, and support competent public companies in their participation in consolidation of industries and sectors or cross-sectoral mergers and acquisitions. To facilitate the implementation of the strategy to make China an innovative country, we should launch the second board and speed up formulating relevant regulations and rules. The second board market will serve as a trading and IPO platform for growing enterprises, making financing easier for SMEs, especially those in the field of high technologies and promoting venture capital investment and establishment of innovation mechanism in enterprises. We will continue to strengthen the regulation and supervision on the capital market to develop and maintain an open, fair and just market environment. We will impose severe punishment on violations of law and regulations such as insider trading, market manipulation, fraud in listing and false disclosure to protect the rights and interests of investors, especially small and medium-sized investors and ensure the steady and sound development of the capital market.

6.3.3 Improve Financial Regulation and Supervision We must improve financial supervision to forestall and defuse financial risks. To respond to the new requirements of financial reforms, innovation, development and opening-up, we will keep improving the systems and mechanisms for financial supervision and strengthen the coordination in financial supervision by the following measures. First, establish the systems for forestalling, early-warning and evaluation of systemic financial risks, and perfect the market crisis management mechanisms. Drawing on the experience of other countries, China will develop supervision and

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evaluation methods and practices for systemic financial risks based on its specific conditions. We will improve the policy tools and other methods such as stress test and on-site evaluation of robustness of financial institutions, improve the early identification and warning of major risks and supervision and evaluation of cross-sector and cross-market financial risks. We will strengthen our statistical capacity and improve the supervision on non-financial institutions that provide financing services and private lending, paying close attention to their impact on the financial system. In view of the stock market crash in China in mid 2015, we must take immediate measures to address the lack of coordination between the People’s Bank of China, the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission in supervision on the capital market and the supervision vacuum. The growing trend of mixed operation in the financial sector in China has posed great challenges to China’s long-standing regulatory framework based on divided operations. We should consider restructuring the regulatory framework for divided operations or combining the aforementioned three regulatory commissions. Alternatively, we may consider establishing a commission of higher level overseeing financial regulation or stability to coordinate the regulatory efforts for different operations. Meanwhile, we must speed up development of the macro-prudential regulatory policies and take a forward-looking approach in financial regulation. Regulatory measures, such as restrictions on leverage ratio and regulation of private funding, should be taken when asset price bubbles emerge to contain the rise of asset prices. In the case of market crash that may trigger systemic financial crisis and even economic crisis, a mechanism of crisis response should be launched as soon as possible to stabilize market expectations and prevent irrational panic in the market. We must ensure the coordination of policies and the consistency of bailout measures for the best possible effect. Second, strengthen the supervision on debt risks of local government. As a precaution, we must have regulations on the purpose and types of debt financing and the bond issuing procedure, and abide by the principle that debts of the government must be compatible with its financial capacity. During the process, we must place great emphasis on information disclosure. In case of any incident that may undermine the debt paying ability of local governments, early warning must be issued. In supervision after the bonds are issued, we must guard against moral hazard. The central government is bound to aid the local governments when the latter encounter fiscal difficulties, which tends to increase the risk of moral hazard and lead to imprudent debt financing of local governments. Considering China’s conditions, in financial regulation and supervision, now we should focus on early intervention and dynamic monitoring. We can use the modern information technologies to establish a nationwide network of government debts data to prevent the local government debt risk from worsening. Third, improve the regulation and supervision on shadow banks. We must develop targeted regulatory indicators targeted at shadow banks. We will strengthen the supervision on risks of shadow banking institutions such as liquidity risk, term mismatch risk, leverage ratio, and counterparty risk and on risks of shadow banks that are of systemic significance. We will impose stricter requirements on information

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disclosure of shadow banks, and inflict heavier punishment on implicit guarantee, misleading sale and sale fraud and so on. We will tighten the supervision on local government debt risks. We must improve the mechanisms for control of systemic financial risks. We should enhance our capacity to deal with systemic financial risks, establish a multi-tiered control mechanism of systemic financial risks and settlement arrangements, and improve the financial security net. We will improve the functions and available instruments of the central bank as the lender of last resort. We will accelerate the legislation on deposit insurance and, when appropriate, introduce and implement the deposit insurance system. We will improve the management systems for the securities investor protection fund, the insurance protection fund and the futures investor protection fund. We will put in place a market exit mechanism for financial institutions to guard against moral hazard. Fourth, strengthen the supervision on bank loans. In our efforts to guard against the risks of loans, we should continue to focus on supervision on loans to financing platforms and real estate loans. The basic principle is that the relevant policies will remain unchanged, while we should deepen rectification, ensure prudent exit and focus on credit enhancement. We will urge the banking industry and financial institutions to examine financing platforms with massive loans and review the risks of loans that mature this year. Different measures will be taken according to the maturity date of loans, risks and repayment capacity and so on. We will continue to urge the banking industry and financial institutions to strictly implement the differentiated housing loans policy and strengthen the name-list management of real estate developers. We should establish dedicated accounts for supervision on real estate developer’s house sale revenue, and tighten the control on land reserve loans and land mortgage rate.

6.4 Perception of the Mixed-Ownership Reform of SOEs and Advice on the Reform 6.4.1 Understand the Core of the Mixed-Ownership Reform: Eliminate the Ownership Discrimination Since the Third Plenary Session of the Eighteenth CPC Central Committee decided in 2014 that we should proactively develop the mixed-ownership economy, there have been heated discussions on this topic, and people of different backgrounds have different interpretations of this decision. How should we understand the mixedownership reform in China? What is the core of the development of mixed-ownership economy? The mixed-ownership reform is now in full swing. In fact, to encourage the development of the mixed-ownership economy is not a brand-new idea or proposal in China. The Sixteenth CPC National Congress and the Third Plenary Session of the

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Sixteenth CPC Central Committee had decided to promote the mixed-ownership economy. The idea had been put in practice. The State Council issued two documents respectively in 2005 and 2010, hoping to encourage and support the development of the non-public sector and encourage private investment in monopoly industries. Regrettably, the efforts did not pay off. The reform of SOEs have not made much progress. Private capital is still confronted with various hidden restrictions and hindrances. The proportion of the state-owned sector in the economy is still too high. The overall economic development is constrained by the way of organization and management of the state-owned sector which is not compatible with the law of the market economy. In some sectors, the state-owned capital enjoys absolute monopoly, and the efficiency is extremely low. SOEs are in urgent need of capital of other forms of ownership to improve their governance and increase their vitality. Why is it the case that we have not made much progress in the reform of SOEs and development of the mixed-ownership economy? In my opinion, the slow progress can be put down to the deep-rooted ownership discrimination due to ideological shackles. Ownership discrimination has caused a number of problems. First, private investors are denied equal access to opportunities and confronted with unreasonable restrictions on market access. It has been difficult to create an environment that promotes fair competition. Second, private investors find it difficult to protect their legitimate rights and interests. Weighted voting rights and disparity in stock prices in different markets have led to significant explicit and hidden loss of private assets. Third, due to ownership discrimination, the government’s sincerity and the measures taken have failed to bring much benefits. Administrative monopolies are so severe that they have seriously impeded the development of the private sector. Fourth, the state-owned capital has deviated from its original intention of making investment in key industries and areas with a vital bearing on the lifeline of the national economy and national security, and has placed too much emphasis on the market and economic benefits. In another word, SOEs in China have been competing with private investors for profits in general competitive areas, forcing a retreat of private enterprises in these areas. Fifth, as a result of ownership discrimination, private investors have been skeptical about the new proposal to develop the mixed-ownership economy in China. Many private entrepreneurs take a wait-and-see attitude, because they are worried that they might be gobbled up by the state-owned capital in public–private partnership. Therefore, to really involve private investors in the mixed-ownership reform in China, we must put an end to ownership discrimination, break the administrative monopolies that restrict competition, and release the restrictions on market access. We must ensure that the private and the state-owned capital have equal opportunities and rights and that they are competing from the same starting line. We must allow private investors to enter the natural monopoly industries and general competitive areas, and ensure that they have a voice and voting rights that are commensurate with their investment. This will lend impetus to maintain China’s continued economic growth.

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For elimination of ownership discrimination, we need to categorize the SOEs and introduce reforms accordingly. What we are pursuing is not a simple retreat of the state-owned capital or the private sector. Instead, through strategic adjustment of the state-owned capital, we will improve the layout of the state-owned sector by increasing the investment of state-owned capital in some sectors while reducing it in others. Some state-owned monopoly enterprises are dedicated to public welfare. They provide, inter alia, non-competitive and non-exclusive public goods and services with externalities, such as public transport, sanitary services, national defense, compulsory education, public health and so on. These enterprises are special legal entities, and their principal objective is to improve the public welfare rather than making profits. Such public goods and services are generally monopolized by not-for-profit SOEs, and avoided by private investors. In these areas, we should increase the investment of state-owned capital. Some state-owned monopoly enterprises seek both profits and social benefits. Examples include SOEs in natural monopoly industries, such as railway transport, power transmission, supply of water, pipeline gas, water conservation infrastructure and so on, and some industries of scarce resources, such as extraction of oil, metal, non-metal minerals and so on. Enterprises in these areas must consider both social and economic benefits, and run on a thin profit margin. We should leave it to the private investors to decide whether they will enter these areas. Some SOEs are for-profit ones in competitive industries, such as the general manufacturing, processing, commercial and services industries. So far, most of the state-owned assets are invested in these industries which are apparently more suitable for private investment. Therefore, we must make a resolute effort to encourage private investment in these industries, while gradually reducing the investment of stateowned capital and ultimately existing from these industries. This should be a longterm goal in the reform. Otherwise, the private sector will not be able to compete with the state sector due to administrative monopoly of the latter. Many private enterprises in China are skeptical about mixed ownership mainly because of administrative monopoly. Considering the current situation and the vested interest groups in China, SOEs will remain in competitive industries in a fairly long period to come. Moreover, most of them will play a dominant role. In the period of transition, the government must delegate power and respect the rules of the market. The state-owned capital should gradually exit from the general competitive areas. To start with, we can have some SOEs exit from these areas or reduce the share of the state-owned capital in these enterprises to less than 50%. We should take measures such as reduction of stateowned shares at market price, increasing registered capital and the number of shares, nominal quotation of land use rights, issuing convertible bonds and so on to attract private investors so that they will participate in the equity diversification reform of SOEs. The ultimate goal of the reform of SOEs is to eliminate the differences in treatment of various forms of ownership. Meanwhile, the dominant position of state-owned shares in relevant industries has caused many problems, such as lack of counterbalance, low efficiency, excessive

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administrative intervention and so on. We must resolve these problems in SOEs that remain in competitive industries for the time being. Meanwhile, we must accelerate the reform of SOE systems for management and operation. SOEs must improve their modern enterprise systems and governance structure centered on the board of directors in accordance with the Company Law of the People’s Republic of China, and ensure equal voting rights of shareholders. We must ensure that no loss of stateowned assets or private assets. The property rights of both the public and non-public sectors are inviolable.

6.4.2 Problems That Require Immediate Solution in the Mixed-Ownership Reform 6.4.2.1

Administrative Intervention in Corporate Governance

A good number of Chinese enterprises, especially public companies, are of mixed ownership in terms of shareholding structure. But the mixed ownership is in name only. The operation of these enterprises still shows significant differences from modern enterprise systems that are fully based on the market mechanism and business performance. According to the shareholding structure, private investors are controlling shareholders in many enterprises. The governance of these enterprises, however, is still controlled by the government. This is a major challenge in the mixed-ownership reform of SOEs. In governance, Chinese enterprises are mostly plagued by board of directors that is inadequate in decision-making, lack of checks and balances, and other problems. Such problems are especially serious in local SOEs. In some local enterprises that have got listed, local governments have great authority over the operation of enterprises, while private investors and foreign investors do not have much say. Companies of mixed ownership have diverse shareholders. They must establish a mechanism for corporate governance to guide the shareholders, board of directors and managers. State-owned shareholders must be constrained to ensure that they exercise their rights in accordance with the law and the articles of incorporation. Administrative intervention has to some extent constrained the role of the general meeting of shareholders and the board of directors, and has adverse effect on the governance of enterprises. For example, the general meeting of shareholders and the board of directors fail to play a full role in profit distribution, dealing with nonperforming assets, evaluation of executives and so on. This undermines enterprise’s impetus and enthusiasm for development. Our research reveals a typical problem. In some public companies, the proportion of shares held by state-owned shareholders has decreased, and the state-owned shareholders are no longer the biggest shareholders. But these companies are still subject to intervention from the state-owned shareholders and administrative authorities of state-owned assets in many areas, such as secondary offering, re-election of

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directors, recruitment of executives and so on. This goes against the principle of rule by the majority and disregards the corporate governance mechanism.

6.4.2.2

Absolute Dominance of State-Owned Shareholders

In governance of enterprises, non-state-owned shareholders have not played an effective role in major decision-making, even though they are owners of the company assets. The principle of rule by the majority is not strictly followed in major decisionmaking processes and operation management, as they are usually dominated by state-owned shareholders, without effective participation of the private and foreign investors. We must treat private shareholders, foreign shareholders and state-owned shareholders as equals in corporate governance, so that we can fully leverage the advantages of mixed ownership. In some stockholding corporations with dispersed and diverse shareholders, the state-owned shareholders are not the biggest, but they have been the virtual controlling shareholders with a complete disregard of others. Non-state-owned shareholders are usually unhappy about the situation, but dare not show it.

6.4.2.3

Problems in Personnel Arrangements

To promote the mixed ownership, the structure of the board of directors must reflect the weights of state-owned, private and foreign shareholders. The enterprise systems must ensure that all stakeholders have played a role in election of directors. So far, the state-owned shareholders have the final say on nomination and election of directors, including independent directors, in state-controlled public companies. The China Securities Regulatory Commission has been promoting the cumulative voting system for the election of directors, hoping to weaken the absolute authority of controlling shareholders in the election of directors, but to no avail. According to the principle of that the Party should supervise the performance of officials, the organization departments of the government play a decisive role and enjoy supreme authority in personnel arrangement of SOEs. A shift from management of personnel, work, enterprises and assets to management of capital has not taken place. We have not found a proper approach to market-based training of professional managers and other personnel for enterprises. A prominent problem is that the election and appointment of enterprise executives are still dominated by the government, and the selection procure and criteria are similar to those of government officials. Such situation has adverse effect on the training and selection of professional managers, and impedes the implementation of a personnel mechanism in which people are prepared for both promotion and demotion and even dismissal. We have not given full play to the advantages of the competition mechanism in enterprises in selection of personnel. To promote the mixed-ownership reform, we must make major breakthroughs in reform of the human resources system of SOEs, and implement a system that their board of directors hire professional managers.

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We observe a phenomenon that is funny and yet characteristic of China in some stockholding enterprises. In selection of executives, it’s not the board of director, but the organizational department and the administrative authority of state-owned assets of the local government that are in charge of the evaluation and decision-making. As we have mentioned, the process is dominated by the government, and the selection procure and criteria are similar to those of government officials. It is hard to believe that this is the case in public companies that got listed years ago.

6.4.2.4

Restriction on Enterprises and Excessive Requirement for Administrative Approval

Enterprises are constrained by regulatory policies of different authorities in incentive stock options for middle and high-level executives, market access, development of innovative business and so on. Meanwhile, the policy of differentiated regulation is not fully implemented. Policies of some government departments are contradictory. Some practice is encouraged by one department, but restricted by another. In regional development and business expansion, enterprises must go through a lot of administrative approval procedures of the government. There are even illegal or unreasonable restrictions that discriminate against some business.

6.4.2.5

Lack of Incentive Plans for Employees

SOEs do not have sufficient positive incentive mechanisms such as stock ownership by employees and management, incentive stock options and so on. In 2009, the Ministry of Finance issued the Notice on Issues Relevant to the Management of Salary of Persons in Charge of State-owned and State-controlled Financial Enterprises. According to the notice, the employee stock ownership plans in state-owned financial enterprises were suspended, and have not been resumed till now. This notice has impeded the attempt of mixed-ownership financial enterprises at employee stock ownership plans.

6.4.3 Advice on Deepening the Mixed-Ownership Reform of SOEs 6.4.3.1

Governments and Officials at All Levels Must Change Their Mindset

Above all, we must change our mindset and fight stereotypes and bias against nonpublic ownership. We should throw off the shackles of ideologies and put the ideological dispute aside. All enterprises that contribute to the country’s economic growth,

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pay taxes, create jobs and pay dividends to shareholders should be treated equally and protected by the law. Government departments must implement the basic strategy of law-based governance and change their mindset. We must take concrete measures to streamline government and delegate power. To which level should the power be delegated? This must be clarified. Moreover, the government may need to give up some of its powers. In a sense, the mixed-ownership reform is a revolution.

6.4.3.2

Pilot Mixed-Ownership Reform Should be Conducted in Representative Enterprises of Various Industries

We should start the mixed-ownership reform by pilot projects. In the process, we must follow the principle that the reform shall be conducted step by step based on the functions of the SOEs concerned. Pilot reforms will be conducted to explore new approaches that can be promoted elsewhere and accumulate experience for implementation of the CPC Central Committee’s decision to promote the mixedownership economy and deepen SOE reform.

6.4.3.3

Conduct Pilot Reforms of the State Assets Management System

We should focus on the following areas. First, the management system should shift the focus of work from management of personnel, specific work, enterprises and assets to management of capital. This will energize SOEs and give full play to the leverage of the state-owned capital. Second, for better returns on capital, we should gradually transform part of the state-owned shares to preferred ones to maintain and increase their value. Returns on the state-owned capital should be invested in key industries and areas that have an important bearing on national security and the lifeline of the national economy to improve the distribution structure of state-owned capital. Third, we should continue with the equity diversification reform. To improve the shareholding structure and governance of SOEs, the proportion of state-hold shares in competitive industries can be further reduced. Fourth, we should conduct category-wise management of SOEs and further delegate power to enterprises. We may classify SOEs into public welfare enterprises, enterprises for both profits and public welfare, and competitive enterprises. They can also be classified according to the proportion of state-owned shares. State-owned shareholders may enjoy absolute authority in SOEs in which they hold more than 50% of the total shares, and have more power than other shareholders if their shares account for 30–50% of the total. In enterprises where the proportion of state-owned shares is below 30%, the government may consider delegating all power to enterprises and having different people serving as the chairman of the board and the Party secretary. State-owned shareholders should not intervene other than playing their due role in nomination or election of the Party secretary, and the chairman of the board if necessary.

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Improve the Corporate Governance Mechanism

First, in accordance with the Company Law of the People’s Republic of China, SOEs should establish a well-regulated governance structure comprising checks and balances between the general meeting of shareholders, the board of directors, the management and the board of supervisors. We must make the investors of enterprises the real owners of the enterprise assets, and give full play to the role of the general meeting of shareholders and the board of directors in profit distribution, dealing with nonperforming assets, evaluation of executives and other fields. Second, we should give enterprises greater autonomy, and major issues of enterprises should be decided by the general meeting of shareholders. Shareholder’s voting rights must be determined by the number of shares they have. State-owned shareholder’s voting rights should also be in commensurate with the proportion of their shares in the total. Third, we should improve the board of directors and give it more power. The board of director must have the power over personnel selection, recruitment and evaluation, rewards and punishments and salary distribution, and play a dominant role in strategic planning, administration of executives and the payroll, and risk management. We should develop systems of accountability for development goals, risk management and control and operation and investment decisions so that the management shoulder more responsibilities in business development.

6.4.3.5

Pursue Innovation in Combination of Market-Oriented Recruitment of Executives with the Principle That the Party Should Supervise the Performance of Officials

To implement the decision of the Third Plenary Session of the Eighteenth CPC Central Committee, we must combine market-oriented recruitment of executives with the principle that the Party should supervise the performance of officials, and clarify the functions of government and enterprises. We must separate government administration from the management of enterprises, and increase the proportion of market-oriented recruitment of executives. The Party committee of SOEs must give full play to the advantages of the CPC in organization and ideology, and serve as the vanguard and political guarantee in uniting the staff, political education, coordination, combating corruption, operation management and other fields. We should encourage innovation and exploration. For example, in SOEs in which the proportion of shares held by state-owned shareholders is below 20 or 30% of the total, we may entrust the membership management of their CPC members to Party organizations at the subdistrict or community level. The Party secretary of SOEs may even be elected by the Party congress, and the Party branches be recorded with the subdistrict or community. We may also consider delegating the power to the board of directors of SOEs to determine the retirement age of managers and the chairman of the board, while the CPC determines the retirement age of the Party secretary. In recruitment and management of SOE executives, we must respect the rules of the market instead

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of indiscriminately applying the management mechanisms of CPC and government organs. We should entrust SOEs to professional managers who have a real knowledge of market rules, and improve the mechanism for training of professional managers in SOEs. The board of directors must follow the international practice and market rules in recruitment or dismissal of executives. Salary of executives should be determined by the board of directors based on the business performance of the enterprise. SOEs should develop mechanisms for personnel arrangement and salary in which people are prepared for promotion, demotion and dismissal.

6.4.3.6

Improve the Legal Environment for Corporate Governance

As mentioned, the most important decision of the Third Plenary Session of the Eighteenth CPC Central Committee is that we should let the market play the decisive role in resource allocation. To ensure the decisive role of the market, we must fully implement the national policy of the rule of law. The government must respect and obey the law. All political parties, social groups, enterprises and individuals must respect and obey the law. We must uphold the rule of law, safeguard the authority of the Constitution, and ensure judicial and administrative justice. We must put in place institutions for effective supervision, regulation and constraint of public power and those in power. We must put the power in the “cage” of institutions and put it under supervision. To be specific, the government must set a good example of following the law, and ensure the enforcement of relevant laws and regulations, including the Company Law of the People’s Republic of China and the Securities Law of the People’s Republic of China. The government should reduce review and approval procedures and stop discriminatory restrictions for legitimate business of enterprises. We should give enterprises greater autonomy in business operation by further streamlining government administration and delegating power. Enterprises must be allowed to make decisions on business operation amid market competition, and take responsibilities for such decisions. We should develop and improve the authorized management system comprising the general meeting of shareholders, the board of directors and executives. We may consider the negative list approach. We must not do anything in violation of laws and regulations, but we should be bold to make innovation that is not prohibited by laws and regulations. We may consider building a system that integrates the supervision on SOEs with the management of state-owned capital.

6.4.3.7

Launch Pilot Programs of Stock Ownership by Employees and Management and Incentive Stock Options for Executives and Employees

Following the decision at the Third Plenary Session of the Eighteenth CPC Central Committee, we should introduce the above-mentioned reform measures to stimulate the vitality and enthusiasm of SOE employees and executives. Such incentive

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mechanisms will boost the enthusiasm of the staff and the business performance of enterprises, thus fostering a community of shared interests consisting of the capital owners and workers. Considering the current situation in China, we believe that China should take bolder measures in this field.

Chapter 7

Opening-Up Under the New Normal

China is now confronted with difficulties and challenges in its reform. According to what we have learned in the past three decades, to reverse the slowdown in reform, it is necessary to bring in external pressure by opening wider to the outside world. As the connectivity and interaction between China’s economy and the world economy continue to grow, China undoubtedly enjoys great space of further opening-up. The benefits of opening-up are still impetus for China’s economic reform, transformation and upgrading. We have reason to believe that under China’s economic new normal, China will take a more proactive approach to opening-up to promote the reform and economic transformation, establish a new system for opening-up, and foster new advantages in international competition.

7.1 Growing Connectivity and Interaction Between China’s Economy and the World Economy After rapid development for over thirty years since reform and opening-up, China has become the world’s second largest economy, the second largest trader, the largest goods trader, the largest exporter, and the second largest importer. China has the largest foreign exchange reserves in the world, and stands at the top of developing countries in terms of the foreign investment it receives. It is the third largest overseas investor in terms of annual investment flow and the second largest overseas investor in terms of annual investment stock. China’s combined outbound foreign direct investment (stock) ranked eleventh in the world. Renminbi has become the fourth most-used payment and settlement currency, the ninth most-traded foreign exchange currency and the seventh most-used reserve currency. While China’s economy is deeply influenced by the world economy, it has also caused profound changes to global economic landscape. The connectivity, interaction and cooperation between China’s economy

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and the world economy have witnessed unprecedented growth in scope and depth, with unparalleled complexity and diversity. As General Secretary Xi Jinping pointed out at the Central Conference on Work Relating to Foreign Affairs in late November 2014, we have achieved a crucial stage of rejuvenating the Chinese nation. The relations between China and the rest of the world are undergoing profound changes. The connectivity and interaction between China and the international community have become unprecedentedly strong. As China’s dependence on the world and involvement in international affairs keep growing, the world’s dependence and impact on China are also increasing. Therefore, while projecting and planning for reform and development, we must give full consideration to both domestic and international markets, both domestic and foreign resources and both domestic and international rules, and use them judiciously. In the following section, we analyze the economic connectivity and interaction between China and the rest of the world from the aspects of strategies, goods and capital, prices, and policies.

7.1.1 Connectivity and Interaction in the Field of Strategies: The Growing Interaction Between China’s Economy and the World Economy Through National Strategies as Represented by the BRI and the Free Trade Zone (FTZ) Strategy 7.1.1.1

The BRI Is an Important Measure for Establishment of a New System for an Open Economy

The Silk Road Economic Belt and the 21st Century Maritime Silk Road are important development strategies at the state level. With the BRI, China is pursuing development space in Eurasia to its west, in countries lying to its east, and in the vast ocean to the south. With a view to accelerating opening-up to the west and making China a maritime power respectively, the Belt and Road constitute an unprecedentedly ambitious strategy in the history of the Chinese nation. It is an initiative that promotes opening-up to the outside world. The BRI is a major strategy introduced by China amid economic globalization to find more areas of common interests with other countries and regions. It is an important measure to build a new system for an open economy. It responds to the call of the time and the aspiration of countries for faster development by providing an inclusive development platform. Rooted in history and based on a solid cultural foundation, the BRI links China’s rapidly developing economy with the interests of countries and regions along the Belt and Road so that they can share the opportunities for development and pursue common prosperity and development. It embodies the CPC’s new ideas about promoting world economic prosperity while upholding the principles of openness, freedom and cooperation in global economic activities. It

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also represents China’s new approaches to benefiting other regions and promoting economic integration in relevant regions in economic cooperation with other Asian countries. It is a new initiative proposed by China to promote global economic prosperity by improving cooperation between China and other Asian countries and even inter-regional cooperation between China and European and African countries. China will continue to uphold opening-up in coastal areas at a higher level, and promote opening-up in the inland and border areas. We will improve the country’s opening-up in scope and depth. We will create a new opening-up structure in which the coastal areas and inland and border areas coordinate and reinforce each other in the opening-up process. We will establish development zones to promote openingup, which will in turn facilitate reform and contribute to the country’s development. By so doing, we hope to find more space for development for China in the long run. Meanwhile, in addition to pursuit of policy coordination, infrastructure connectivity, unimpeded trade, financial integration, and closer people-to-people ties, China will also improve its relationship with neighboring countries. We will promote trade and investment facilitation, and increase our economic and technological cooperation and exchanges. We will build a free trade area of the Asia–Pacific (FTAAP) and play a leading role in it. We will create a community with a shared future with countries along the Belt and Road to enhance our strategic maneuverability for development. In the process, China must shoulder its responsibilities as a major country and show the world its resolution to promote common prosperity and development. We need to make it clear that China will collaborate with countries and regions along the Belt and Road and fulfill its responsibilities as a major country to create a new global landscape. With the BRI, China is not only seeking development by utilizing resources from other parts of the world. Instead, bearing in mind the long-term interests of the Chinese nation, the BRI aims at building a community with a shared future by cooperation with countries along the Belt and Road. China will uphold the principles of market orientation and free trade, and continue to promote openness in the global market and free flow and growth of the factors of production. To facilitate the implementation of the BRI, at the proposal of China, the Asian Infrastructure Investment Bank (AIIB) is established by China and some countries along the Belt and Road. The AIIB provides funds to infrastructure construction in countries and regions along the Belt and Road and promotes economic cooperation. In addition, the Silk Road Fund is established to provide financial support to the Belt and Road with capital from China.

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The FTZ Strategy Is an Important Element of a New Round of Opening-Up in China. It Is an Important Measure to Address Foreign Relations and Implement Foreign Strategies. FTZs Are an Important Platform for China to Participate in Formulation of International Trade Rules, and to Acquire the Institutional Power for Global Economic Governance

The BRI, more focused on physical connectivity, promotes policy coordination, infrastructure connectivity, unimpeded trade, financial integration, and closer peopleto-people ties. Infrastructure connectivity is the prerequisite and a core content. The FTZ strategy, on the other hand, is more focused on institutional connectivity. It aims to accelerate economic integration in the region by lowering trade barriers, and improving trade and investment facilitation and liberalization. As pointed out by Xi Jinping, accelerating implementation of the FTZ strategy is an important element of a new round of opening-up in China. It is an important measure in addressing foreign relations and implementing foreign strategies. FTZs are an important platform for China to participate in formulation of international trade rules, and to acquire the institutional power for global economic governance. Instead of being a bystander or follower, China should participate in such process and take the lead. The FTZ strategy is an important element of a new round of opening-up in China for the following reason. Above all, FTZ means more than zero tariff and zero quota. FTZ is also about, inter alia, trade and investment facilitation and liberalization, a more open financial service industry, and continuous improvement of government regulation. FTZs are an important symbol that the country is pursuing all-round economic opening-up and that its economic system is integrating into the globalization process. Accelerating the implementation of the FTZ strategy will help China make better use of both domestic and international markets, both domestic and foreign resources, and both domestic and international rules in the new era. Consisting of multiple dimensions, the FTZ strategy follows the trend of world economic development. It is a mature institution in the field of international trade. Accelerating the implementation of the FTZ strategy will help China address foreign relations and implement foreign strategies. FTZs are an important platform for China. FTZs are a kind of regional trade arrangements which drives economic globalization along with multilateral trade systems. Now that the negotiations for multilateral trade systems have reached an impasse, it is imperative that we must move at a faster pace to implement the FTZ strategy. FTAs will enhance China’s global competitiveness, enable China to better participate in formulation of international trade rules and win more institutional power in global economic governance to protect its interests. China is now facing a favorable environment to accelerate the implementation of the FTZ strategy. As an ancient Chinese saying goes, “opportunities are rare and hard to grasp, and easy to lose”. The world economy is undergoing profound transformation and adjustment, the Third Industrial Revolution is emerging, and the world has entered an era of the services economy. Such international situation provides

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rare opportunities for China’s economic transformation and upgrading so that we can foster new economic advantages. In China, after years of economic development and deepening reform, we have entered a stage of new normal of economic development. We must find new driving forces for development and proper solutions to problems and challenges in China’s economic and social development. To this end, we must open wider to the world, and give full consideration to both domestic and international markets, both domestic and foreign resources, both domestic and international rules, and use them judiciously to improve the allocation of factors and resources.

7.1.2 Connectivity and Interaction in the Fields of Goods and Capital: The Inception of a New Opening-Up Structure and a New System for an Open Economy, Comprising Foreign Trade, Attracting Foreign Investment, Outbound Investment, Cross-Border Capital Flow and so on The Central Economic Work Conference in December 2014 re-defined China’s opening-up structure. According to the conference, in view of the new situation in opening-up, China must be more proactive to strike a balance between domestic and external demands, between imports and exports, and between attracting foreign investment and making outbound investment. The ultimate goal is to achieve a balance between revenue and expenditure in balance of payments and establish a new system for an open economy. The world economy, after a period of profound readjustment in 2014 in the aftermath of the global financial crisis, was expected to see a small increase in growth rate in 2015, but the overall recovery would still be sluggish. As the global aggregate demand remains weak, China is losing its comparative advantage of low cost, but it is still competitive in exports. At one and the same time, China is going out on a greater scale, and bringing in products of higher technology. As a result, we will see many new characteristics in the connectivity and interaction between China’s economy and the world economy in the fields of goods and capital.

7.1.2.1

China’s Foreign Trade Will Continue to Grow at a Low Rate

China failed to meet its foreign trade target for three consecutive years from 2012 to 2014. In 2012, China’s foreign trade grew by 6.2%, far lower than the target of 10%. In 2013, China superseded the US as the world’s top trader with trade in goods exceeding four trillion US dollars, but the growth rate of its foreign trade still failed to meet the target of 8% and stood at 7.6%. In 2014, China’s growth rate of imports and exports was only 2.3%, much lower than the target of 7.5%, but it was faster than

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that of many other major countries. Apparently, the international economic situation will remain grave, and the outlook for China’s foreign trade is not bright. Considering that the world economy would very likely grow at an even slower rate, the year 2015 was expected to see a slow growth rate of China’s foreign trade and a single-digit growth in exports from China. On one hand, we have observed recovery of demand in the developed economies which is conducive to boosting global trade. The US economy experienced strong recovery thanks to the growth in its domestic consumption. The demand in the eurozone remained stable as a result of continued easy policy. The global trade in 2014 and 2015 was forecast to grow by 3.8% and 4.9% respectively, according to the IMF. The anticipated growth rates were much slower than the average rate of 7.3% before the global financial crisis, but grew significantly from the approximately 3% growth rate in 2012 and 2013. On the other hand, it was predicted that the divergence between currencies of major economies would continue to grow in 2015. The renminbi would remain stable against the US dollar, but it would passively appreciate against other major currencies such as the Japanese yen and the euro. The weighted average of real effective exchange rate of the renminbi was expected to rise. The passive appreciation of the renminbi weakened China’s competitiveness in foreign trade and caused downward risks in its exports. Under the effect of the above two contradictory factors, in 2015, China’s imports and exports totaled 24.58 trillion yuan, down by 7.0% from 2014: The exports fell by 1.8% to 14.14 trillion yuan, and the imports dropped by 13.2% to 10.45 trillion yuan. That translates to a trade surplus of 3.69 trillion yuan, up by 57% from 2014.

7.1.2.2

China Is Facing a Worsening Environment in Attracting Foreign Investment

For twenty-three years in a row, China has ranked first in developing countries in terms of the foreign investment in the country. Meanwhile, China’s non-financial outbound direct investment has been growing rapidly. We expect to see the balance of inbound and outbound investment soon. But we must not deny that the environment for China to attract foreign investment got worse in 2014, as shown in the decrease in foreign investment in China for four consecutive months. According to the Ministry of Commerce, foreign investment in China in 2014 totaled US$119.57 billion, registering a small growth of 1.7%. Of course, this should be considered in the context of worldwide decrease in and even withdrawal of foreign investment. China’s performance in this regard is not too bad if compared with other countries and regions. In the first half of 2014, foreign investment was down by 32% in the EU, 50% in Russia and 2% in Brazil, and the growth in the US was negative. In 2015, foreign investment in China amounted to US$126.27 billion, up by 6.4% from 2014. In 2016, the continuous moderate decline in China’s economic growth rate will affect foreign investor’s confidence on its long-term economic development. We don’t see much prospect for fundamental improvement in the environment for China to attract foreign investment.

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China’s Annual Outbound Investment Will Exceed Foreign Investment in China

China’s outbound direct investment (ODI) maintained a high growth rate in 2014 and reached a record high of US$123.12 billion, up by 14.2% year-on-year. China’s annual ODI has been growing for twelve consecutive years since it started disclosing such statistics in 2003. Its annual flow of ODI in 2014 is 45.6 times the flow in 2002. From 2002 to 2014, the annual growth rate of China’s ODI reached 37.5%. In 2014, China’s ODI is US$5.38 billion short of foreign investment in China, approaching a balance between inbound and outbound investment for the first time. In the same year, the outbound investment and worldwide investment of the US were both down by 27%, and Japan’s outbound investment fell by 22.9%. China undoubtedly outperformed major developed countries in cross-border investment in 2014. China’s nonfinancial ODI in 2015, amounted to US$118.02 billion, up by 14.7% year-on-year. This marks China’s thirteenth consecutive year of growth in ODI, with an annual growth rate of 33.6%. Meanwhile, China’s ODI accounts for a small proportion of its foreign exchange reserves. By the end of 2015, China’s non-financial ODI accounted for only 3.54% of its US$3.33 trillion foreign exchange reservices, the world’s largest. With large foreign exchange reserves and small ODI stock, China boasts great potential for further ODI. As is pointed out at the Central Economic Work Conference in 2014 which made macro-economic policies for the coming year, China is going out on a greater scale, and bringing in products of higher technology. We must be more proactive to promote a balance between foreign investment in China and China’s outbound investment.

7.1.2.4

The Influencing Factors of Cross-Border Capital Flow Are Growing Increasingly Diverse and Complicated

China’s cross-border capital flow shows two evident divergences1 in 2014. One is the divergence between foreign trade surplus and the increase in foreign exchange reserves. According to statistics of the customs, China’s trade surplus reached US$214.4 billion in the second and third quarter of 2014, up by 69% year-on-year. In the same period, the increment of China’s foreign exchange reserves, according to statistics of balance of payments (eliminating the valuation effects of exchange rate and variation in asset prices), was only US$22.4 billion, down by 85% year-onyear. Another divergence exists between the flow direction of cross-border capital and the interest-rate spread between the renminbi and foreign currencies. The two evident divergences are an illustration that the influencing factors of China’s crossborder capital flow are growing increasingly diverse and complicated. In addition to traditional factors such as trade and interest-rate spread, other domestic and international economic fundamentals are also receiving increasing attention from the 1 Tao Guan, “Get ready for the two-way impact of cross-border capital,” Shanghai Securities News, December 25th, 2014.

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market, and have influence on risk preference and financial operation of market entities. Meanwhile, the multiple equilibria in China’s foreign exchange market are growing increasingly prominent. Given China’s trade surplus and the positive carry of renminbi against foreign currencies, China’s foreign exchange market may witness either an oversupply or an undersupply. There will be greater volatility in cross-border capital flow. Multiple factors are likely to influence China’s balance of payments in 2016. On one hand, China will continue to maintain a large trade surplus, and maintain the positive carry of the renminbi against the US dollar, the euro, the Japanese yen and other major international currencies. China’s economy will keep growing at a rate that is relatively fast in major economies. On the other hand, China is facing many uncertainties, such as its economic performance, renminbi exchange rate movements, release of fiscal and financial risks, changes in monetary policy, and divergence in the world economy and monetary policies. It is foreseeable that with current account surplus, we will see more two-way movements in China’s cross-border capital flow in 2016. If favorable domestic and international factors prevail, cross-border capital will surge into China, leading to an oversupply of foreign currencies in China’s market. In that case, the surplus in foreign currencies may surpass the trade surplus. If the prevalent factors in China or the international market, or both markets, are unfavorable, cross-border capital will flow out of China, balancing the supply and demand in China’s foreign exchange market. In this case, the gap between supply and demand will be smaller than trade surplus. There may even be an undersupply of foreign currencies.

7.1.3 Connectivity and Interaction in the Field of Prices: The Factors Influencing the Internal Value (i.e., the Prices of Goods) and External Value (i.e., the Foreign Exchange Rate) of Currencies and the Currency Pricing Mechanism Are Growing Increasingly Diverse and Complicated, and China Is Increasingly Interconnected with the International Market 7.1.3.1

The Fall of Commodity Prices in the International Market Will Lead to Imported Deflation in China

Since the second half of 2014, the international commodity markets have experienced a dramatic fall of prices and remained sluggish, the most typical being the international crude oil market. Corn, gold, coal, and cotton are no exception. The prices of crude coil and iron ore, the most traded commodities, fell off a cliff and kept dropping in the second half of 2014. The situation is a dramatic contrast from the long-time prosperity driven by the rapid development of emerging economies at the beginning of the twenty-first century.

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Take the international crude oil prices as an example. Three factors contribute to the seven-year low in 2014 of the WTI crude oil price and the price of the Brent crude oil futures. First, though the US economy continued to recover in 2014, the economy in Europe, Japan and the developing countries was not very good. Due to lack of demands as a result of slow recovery of the world economy, there was an imbalance of supply and demand, which led to the fall in crude oil prices. Second, a mismatch remained between the supply and demand in the international crude oil market. One reason is that the US made further progress in shale technology, biotechnology and deep-sea exploitation technology, and there were revolutionary breakthroughs in energy supply. Another reason is that the Organization of Petroleum Exporting Countries (OPEC) did not cut production to boost oil prices. Third, the long-term strength of the US dollar, owing to the interest rate hike of the United States Federal Reserve, and the rise in the interest rates of the US bonds were a blow to the crude oil denominated in the US dollar. The price movements of other commodities are also influenced by similar factors. In 2016, multiple factors are likely to cause a drop in commodity prices in 2016. As the United States Federal Reserve enters an interest rates hike cycle, the US dollar will continue to be strong. Geopolitical tensions in Russia, Iran, Saudi Arabia and other countries and regions have not dissolved. In view of the slowdown in demand growth, major economies such as China, Europe and Japan will adopt easy monetary policies. The US will continue to make progress in extraction of shale oil. We don’t anticipate significant changes to any of these factors in the short run. They will continue to affect the price movements of the commodity markets in 2016, and the commodity prices are likely to further drop. The market panic is growing and is likely to spread. Considering the shrinking demands and the growing supply, we believe that the commodity prices in the international market will continue to fall and remain low. Chances are small that there will be a rebound. In view of the continuous significant drop in commodity prices, an immediate impact on China is the risk of imported deflation. Deflation will directly affect the prices of upstream raw materials including refined oil, iron ore and metal, which will in turn affect the prices of extraction and chemicals in the producer price index (PPI), the prices of fuel in the consumer price index (CPI) for transport and the prices of water, power and gas in the CPI for housing. The fall in the costs of economic development reduces the upward pressure of the CPI. In particular, the plunge in oil prices is likely to cause a greater risk of deflation in China. In the medium and long run, the drastic fall in crude oil prices does more harm than good to China’s adjustment of energy structure. Low oil prices lead to a lack of motivation to exploit alternative energy such as shale gas, coalbed methane, solar energy, and wind energy. On the other hand, as oil is the lifeblood of industry, the plunge in oil prices in the international market has some positive effects on China’s macro economy. It is of direct benefit to the shipping industry, logistics industry, and automobile industry. Other industries that consume oil will also benefit from lower costs. The plummet in oil prices will also change the international geopolitical situation, and lead to re-distribution of interests between the crude oil producing countries and importing countries. The political, military and economic competition between

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countries, centering on the price movements of energy and resources, will become increasingly fierce.

7.1.3.2

The Renminbi Will Have Greater Two-Way Volatility and Flexibility

The internal value and external value of currencies have both experienced sharp fluctuations. Under the impact of the continuous fall in international crude oil prices and a stronger US dollar, the Russian ruble plummeted in the second half of 2014. In response, Russia took measures to defend its currency at the end of 2014. The Russian ruble crisis caused currency fluctuations in emerging markets, resulting in a plunge in the exchange rates of the Brazilian real, the Turkish lira, the Indonesian rupiah and some other currencies against the US dollar. In early December 2014, the MSCI’s Emerging Markets Currency Index reached its lowest level since 2000. The economy of Russia, Brazil, South Africa and some other emerging market economies caused much concern. Moreover, the global commodities markets remained in a bear market, causing currency depreciation in these economies. Meanwhile, the US economy continued to recover. The US Federal Reserve ended the quantitative easing program, and it was expected that they would again raise the interest rate in 2016. These factors also contributed significantly to the drastic depreciation of the currencies of emerging market economies. Capital outflow also increased amid the currency fluctuations. In contrast, as the expectation for the US Federal Reserve’s interest-rate hike grew higher, the US Dollar Index began to climb from late 2014, reaching its highest level in nine years in early 2015. Statistics show that since the second half of 2014, the US Dollar Index has risen by more than 10%, which is never seen in the past eighteen years. The continuous rise in the exchange rate of the US dollar is driven by the sound economic development of the US. A large-scale capital flow from emerging markets to the US took place in this period. As far as we can see, the US economy is recovering, and the international capital is flowing back into the US. The US dollar will continue to be strong as the United States Federal Reserve will inevitably raise the interest rates. Therefore, we anticipate that the US Dollar Index will rise steadily in 2016. Meanwhile, the euro and the Japanese yen will further depreciate against the US dollar. Amid the currency fluctuations in the emerging markets, the exchange rate of the renminbi also stopped the upward trend that had lasted for months, and began to fall at the end of 2014. That is caused by several factors. First, the international market was not optimistic about China’s short-term economic growth. Second, China’s outbound investment was on the rise, and its capital account was likely to have the first deficit in years. Third, the renminbi was under depreciation pressure due to the tightening US monetary policy and an increasingly strong US dollar. In this case, the People’s Bank of China decided to improve its central parity system to make the renminbi central parity rate against the US dollar more market-oriented and to improve its benchmark status. Starting from August 11th, 2015, market makers must report the

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daily central parity quotes to the China Foreign Exchange Trade System before the inter-bank foreign exchange market opened based on the closing rate of the market on the previous day, supply and demand in the market, and price movements of major currencies. The central parity rate of the renminbi against the US dollar was lowered by 1.9% on that day, and the onshore renminbi and the offshore renminbi devalued by 1.8% and 2.8% respectively against the US dollar. The renminbi have had several slight devaluations since the fourth quarter of 2011. Its depreciation by 1.8% this time was the largest single-day drop since the reform of China’s foreign exchange system in 1994. We believe that the depreciation of the renminbi will last for some time, but it will not be a standing policy. The renminbi equilibrium exchange rate is coming closer, so there will not be a drastic depreciation of the currency. Moreover, the central bank of China has the capacity to stabilize its value. In 2016, the renminbi is likely to devalue due to a strong US dollar, slowdown of China’s economic growth, the narrowing interest-rate spread between renminbi and the US dollar and other factors. Meanwhile, it will have greater two-way volatility and flexibility as a result of China’s efforts at liberalization and internationalization of the currency and external political pressure. The exchange rate of the renminbi against the US dollar is likely to first drop and then rise, and chances are good that the exchange rate will fluctuate between 6.5 and 7.

7.1.4 Connectivity and Interaction in the Field of Policies: China’s Independence in Monetary Policy Is Affected by the Uneven Recovery of the Developed Economies and the Emerging Economies, and It Is Facing Greater Difficulties in International Coordination 7.1.4.1

The Developed Economies Are Experiencing Uneven Recovery, and the Emerging Economies Are Undergoing Adjustments

The worldwide economic growth has become increasingly uneven since 2014, showing an increasingly pronounced trend of multi-tiered recovery. Among the developed economies, the US and the UK are facing a better situation in economic recovery. The economic growth of the US in the third quarter of 2014 was especially outstanding. Europe and Japan, on the other hand, were confronted with great challenges and struggling with recession. As for the emerging economies, except for China which maintained a medium-to-high growth rate, they have all experienced a decline in growth rate. The slowdown in economic growth was especially prominent in Russia and Brazil and some other emerging economies. Against such a backdrop, the central banks of major economies adopted divergent monetary policies. The US Federal Reserve called an end to the quantitative easing program, taking the lead in commencement of the monetary policy normalization process. But it has been

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cautious about the timing of the interest-rate hike. In the meanwhile, to address the recession, the European Central Bank is considering quantitative easing, and the central bank of Japan is also relaxing its monetary policy by quantitative and qualitative easing. The developed countries will continue to adopt easy monetary policies. After the financial crisis, extremely easy monetary policies were prevalent in the developed countries. Their benchmark interest rates reached a historic low. The US Federal Reserve and the central banks of the UK and Japan embarked on quantitative easing to boost their economy. As the developed economies have been uneven in economic recovery, their monetary policies have also become increasingly divergent. The UK, the US and some other developed countries have started normalization of monetary policy. The US put an end to the quantitative easing in 2014 and raised the interest rate in December 2015. The central bank of the UK is also considering the timing of the first interest-rate hike since the normalization of its monetary policy. Europe and Japan, however, have been relaxing their monetary policies to address the recession. Due to lack of continuous driving engines for global economic growth, we believe that the central banks of major economies will remain cautious about tightening or relaxing monetary policy in 2016 to maintain the momentum for economic growth. The emerging economies are still undergoing adjustments. The year 2014 witnessed a decline in economic growth rates of these economies. The central banks of many emerging economies adopted easy monetary policies. For most emerging markets, decline in international oil prices reduced the inflation pressure, and provided their central banks with a greater space for maintaining easy monetary policies. But as they were confronted with many uncertainties such as volatile financial market and high inflation rate, it is hard to predict the monetary policy that might be adopted by their central banks. Since the financial crisis, the easy monetary policy of the developed economies has had a sustained impact on the financial market of emerging economies. A substantial amount of capital flew from the developed economies to emerging ones, pushing up the latter’s asset prices and debts. After the US Federal Reserve decided to tighten its monetary policy, the emerging economies saw two sell-offs and wide fluctuations in their financial markets in 2014. If the US Federal Reserve raises interest rates in 2016, the interest-rate hike is likely to adversely impact the emerging markets and cause new challenges to them. We anticipate that the world economy will continue to recover in 2016, but there will not be any significant improvement. In view of the strong economic growth in the US, organizations have forecasted that the world economy will maintain the upward trend in 2016 and that the growth rate will be higher than in 2015. According to the IMF, the world economy will grow by 3.6% in 2016, up by 0.5% point from 2015. Meanwhile, we must give full consideration to some disadvantages and risks. Examples include growing trade protectionism, the impact of divergence between major developed economies in macro policies and changes in such policies, and greater geopolitical volatility. Considering such unfavorable factors, we believe that the developed economies will maintain slow economic growth, and will not be able to really turn the corner in a short period. Meanwhile, the adverse effect of supply

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constraints and tightening financial conditions are likely to last longer on some major emerging market economies. In short, we will see only marginal improvement in the world economy in 2016.

7.1.4.2

The Impact of the Adjustments and Changes in Monetary Policies Worldwide on China’s Economic Development and Macro Policies Under the New Normal

Generally speaking, in 2016, easy monetary policies will continue to prevail, and the liquidity feast will not end. The adjustments and changes in monetary policies worldwide will continue to directly influence China’s economy and macro policies under the new normal. On one hand, as the US Federal Reserve called an end to quantitative easing, there has been a fundamental shift in its monetary policy. This change will lead to appreciation of the US dollar, and some other significant influences. The appreciation of the US dollar has caused dramatic fall of commodity prices, especially energy prices. The strong economic growth of the US will become a new driving force for the global economy, which will boost the global economic recovery. The fall of commodity prices significantly reduces the global inflation pressure, but causes a greater deflation risk which is spread worldwide. China, a major importer of energy and resources, will bear the brunt of the deflation risk. The import capacity of the US is enhanced significantly thanks to the appreciation of the US dollar, which provides many countries with a favorable external environment for export and greater external demands. Meanwhile, worldwide capital is flowing into the US at a faster pace, which has far-reaching influences on emerging economies including China. Continuous capital outflow will lead to greater volatility in the macroeconomy. On the other hand, in view of the economic fluctuations in recent years in Japan and the sluggish recovery of the European economy, the central banks of Japan and Europe will continue to implement the monetary policies of quantitative easing to boost economic recovery. Such policies create more liquidity, the spill effects of which are mostly favorable to China. In view of the prevalence of easy monetary policies worldwide, to fulfill the challenging tasks of maintaining growth, adjusting structure, promoting reform, improving the people’s livelihood and so on, China must adopt a moderately easy monetary policy. Meanwhile, in formulation of monetary policy, we must keep a close eye on inflation and guard against asset price bubbles, overcapacity and zombie enterprises. To balance its multiple goals, China must adopt a more flexible, forward-looking and efficient monetary policy in 2016, with easing or tightening as appropriate. In short, the uneven recovery of the developed and emerging economies will inevitably influence the independence of economies in formulation of macro policies and increase the difficulties in international coordination.

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7.2 Pursue Opening-Up at a Higher Level 7.2.1 China Has Entered a Critical Stage of Comprehensively Improving the Level of Opening-Up 7.2.1.1

China Is a Large Trading Nation, but a Major Trading Power

According to the WTO, China’s imports and exports of goods totaled US$4.16 trillion in 2013. That made China the world’s largest trader in goods in place of the US. Despite China’s large volume of foreign trade, however, it does not have much advantages in competition. First, as China’s industries remain at the middle and low ends in the international division of labor, the value-added content in China’s exports is low, and the return on value in exports is also comparatively low. Among the mechanical and electrical products manufactured in China in 2013, 61.2% were from foreign-funded enterprises, and 51.1% were exported via processing trade. In the same year, 73% of the hi-tech products in China were manufactured by foreign-funded enterprises, and 65.3% were exported via processing trade. Second, as domestic enterprises in China do not have globally competitive brands and have a heavy reliance on OEM, they do not have the power of pricing, which results in their low share of profits. For example, not a single Chinese brand was on Interbrand’s 2005 list of Best Global Brands. Third, China is leading the world in trade in goods, but lags behind in trade in services. In 2012, China’s exports of services accounted for 8.51% of its total exports of goods and services, much lower than the world average of 19.03%. Fourth, the ever-fiercer competition in the international market leads to rising competition pressure on China, and poses profound challenges to its traditional advantages. Chinese enterprises are under great pressure in operation in view of the rising labor cost. From 2010 to 2012, more than two thirds of China’s provinces witnessed a 20% annual growth in minimum wage, while problems such as labor shortage, difficulty in hiring and retaining qualified workers became more and more pronounced. In addition, since China started reform of its foreign exchange rate system in July 2005, the renminbi has appreciated over 30% against the US dollar, while currencies of China’s major competitors have devalued. The appreciation of the renminbi has created great pressure on China’s export enterprises. Therefore, the transition from a large trading nation to a major trading power is a common aspiration of the Chinese people. It is an important task that must be fulfilled in China’s development of foreign trade. China’s foreign trade has grown in size thanks to our advantages in scale and experience. But the transition to a trading power requires technological upgrading, structural adjustment and improvement of the country’s comprehensive strength. The key is to foster new advantages in international competition.

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China Is in an Important Period of Opportunity for Fostering New Advantages in International Economic Cooperation and Competition

The world economy is undergoing profound transformation and adjustments. New changes are taking place in the world economic landscape. Major developed economies have experienced sluggish economic recovery in recent years, while the emerging economies have been developing at a fast rate. The top ten emerging economies in terms of economic aggregate accounted for 14.1% of the global economy in 2001. This figure rose to 24.2% in 2010. Meanwhile, with the increasing integration of economies in the Asia–Pacific region, these economies are increasingly interconnected, and the division of labor in this region is deepening. As their economic aggregate continues to grow, we observe a new trend that the world’s center of economic gravity is shifting towards the Asia–Pacific region. Meanwhile, both developed economies and emerging economies are accelerating transformation. The world economy has been severely hit by the global financial crisis. Considering the complex and volatile situation with increasing uncertainties, recession will become the new normal of the world economy in the coming period. The developed countries are working to change the consumption pattern of buying on credit, bring back the manufacturing industry and increase the proportion of the real economy. The emerging economies, on the other hand, are making efforts to expand domestic demands, accelerate industrial transformation and upgrading, and pursue innovationdriven development. The world economy is undergoing profound transformation and adjustment, the Third Industrial Revolution is emerging, and the world has entered an era of the services economy. All these provide rare opportunities for China’s economic upgrading, which is conducive to China’s development of new economic advantages.

7.2.1.3

China Is Facing Increasing International Risks in Economic Development

First, trade protectionism of various forms has been on the rise. Statistics showed that the trade remedies investigations against China’s exports of goods increased in both the number of cases and the value involved. According to the Ministry of Commerce of the Republic of China, China faced seventy-seven such investigations imposed by other countries in 2012, involving US$27.7 billion, up by 11.6% and 369% respectively from the earlier year. An increasing proportion of the investigations were launched by the US, the EU, Canada and other developed economies. The goods under investigation also expanded from agricultural products and low value-added industrial goods to high value-added products. Second, China is facing more and more barriers in outbound investment. Protectionism also hinders China’s outbound investment, including investment by SOEs and

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private enterprises. This is especially true in Europe and the US. Many Chinese enterprises, including Huawei, ZTE, and SANY, have been rejected by some countries over concerns of national security. Third, global financial risks are increasing. The monetary policy of quantitative easing adopted by the US, Japan and some other countries to address global financial risks has caused excessive liquidity worldwide. For China, the global excess of liquidity not only makes it more difficult for the country to preserve and enhance the value of its foreign exchange reserves, but also creates more uncertainties in the world economy. China’s foreign exchange reserves have been growing in the past decade. As of the end of December 2015, China’s foreign exchange reserves, mostly the US dollar, totaled US$3.33 trillion. The US dollar devalued by 23.35% against other currencies from 2000 to 2012. While other currencies have been depreciating, the exchange rate of the renminbi has been climbing. In view of the interest rate spread and the exchange rate differences between the renminbi and other currencies, hot money have been surging into China to arbitrage. The inflow of hot money results in more uncertainties in China’s economic development. The demand for the renminbi has also increased consequently, leading to continuous appreciation of the renminbi. The appreciating renminbi has been a great source of pressure for China’s export enterprises, raising their costs while reducing their profits. Fourth, the enthusiasm for further opening-up is wearing off. At the moment, there is a tendency in China to be complacent about the benefits of reform and opening-up and China’s achievements in economic development after joining the WTO. Due to rather limited knowledge of, and even repulsion for the new rules and new developments of international free trade, China’s pursuit of opening-up in more areas and an open economy has been adversely impacted by a lack of strategic vision, and China has made no major breakthroughs in this regard. The opening-up in a small number of areas has stagnated or even decreased. In the context of globalization, both developed countries and developing countries should adopt proactive opening-up strategies, and actively participate in the globalization process while protecting their own interests. Only with an open mind can we make full use the global resources, demands and talents, and achieve a win–win outcome in cooperation amid globalization.

7.2.2 Approaches to Opening-Up at a Higher Level Facing the new global economic situation, China must adopt a more proactive opening-up strategy. After the Eighteenth CPC National Congress, Xi Jinping emphasized on many occasions that China would always keep its door to the outside world open. According to Xi Jinping, China’s door has opened, and will remain open. Economic globalization and regional economic integration are the trend of the times. China has responded to such trend and remained committed to the policy of opening-up, which provides a vital driving force for China’s economic development. Xi Jinping pointed out that China’s concern is not whether we should remain open to the outside world, but how we can bring the opening-up to a higher level. Xi

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Jinping emphasized that China must implement a more proactive opening-up strategy and foster new competitive edges, so as to broaden and deepen the comprehensive improvement of China’s open economy.

7.2.2.1

Expand the Areas of Converging Interests

Foreign trade has become an important area of converging interest between China and other countries and regions. In the past three decades since reform and openingup, especially since China became a member of the WTO, China has leapfrogged in foreign trade. In 1978, China’s imports and exports of goods amounted to US$20.6 billion, ranking 32nd in the world, accounting for less than 1% of the world total. In 2013, China became the world’s largest trader in goods, with imports and exports of goods standing at US$4.16 trillion, accounting for 12% of the global trade in goods. China is now the largest trading partner of over 120 countries and regions. With an annual import of goods of nearly 2 trillion US dollars, China has created a great amount of jobs and investment opportunities for its trading partners worldwide, and made a significant contribution to economic development of these countries and regions. In the meanwhile, China’s trade in services is also developing rapidly. The earliest statistics about China’s trade in services in 1982 showed that its imports and exports of services in that year totaled US$4.4 billion, accounting for 0.6% of the world total. In 2013, the figure rose to US$539.64 billion, registering a growth rate of 14.7% from the earlier year, nearly doubling the 7.6% growth rate of China’s imports and exports of goods. The share of services trade in China’s foreign trade has been on the rise, and reached 11.5% in 2013. In addition, as of the end of 2013, China’s outbound direct investment exceeded US$630 billion, making the country the world’s third largest investor. As China’s economy continues to grow, its imports and outbound investment will keep rising, which will create more development opportunities for relevant parties and reveal more common interests between China and other countries. In the future, China should adapt to the new trend of economic globalization and move at a faster pace to promote opening-up both at home and abroad, combine “bringing in” with “going out” and promote the in-depth integration of the domestic and international markets. We must accelerate the development of free trade zones (ports), and speed up the negotiation of trade and investment agreements with relevant countries and regions. We should accelerate the implementation of the FTZ strategy with neighboring countries as the basis, and find more common interests between China and other countries. By so doing, not only China and other countries will benefit from each other’s development and work together to deliver more benefits to the people worldwide.

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Move Faster to Foster New Strengths for Participating in and Leading International Economic Cooperation and Competition

China is facing an external environment for development that is increasingly complex and volatile. We must deepen reform and opening-up in major areas and key points to accelerate fostering new advantages for participating in and leading the international economic cooperation and competition. We must occupy the commanding heights in global industrial development, and realize the transform from “made in China” to “created in China” and ultimately to “services from China”. We should take the following actions. First, we must promote the shift of emphasis from traditional advantage of lower production costs to new advantages in core competitiveness. We should enhance the internal driving force of enterprises for technological innovation and transformation, build solid industrial and technological foundations for export, and encourage enterprises in the fields of technology-intensive mechanical and electrical products and emerging industries of strategic significance to develop foreign markets. Second, we must vigorously foster brand names in exports, support enterprises in establishment of overseas marketing network, and increase the value added of exports. We should encourage enterprises from the mainland of China to set up capital operation center in Hong Kong, making Hong Kong an information and financing platform for Chinese enterprises to go global. Third, we should encourage Chinese enterprises to set up R&D centers in countries and regions where there is a heavy concentration of technological resources to promote industrial innovation by taking advantage of global resources. They can either establish such R&D centers relying on their own resources, or through mergers, joint investment or collaboration. Fourth, we must give full play to the role of technology import and export, and improve our secondary innovation based on imported technologies. With large backbone enterprises and industrial technology innovation alliances, we must make breakthroughs in key technologies and improve China’s innovation-driven industrial development and core competitiveness. Fifth, we must improve our management of outbound investment, provide services to facilitate and support enterprises in their efforts to go global, and improve the comprehensive strength of Chinese enterprises by promoting outbound investment. Sixth, we must coordinate bilateral, multilateral and regional cooperation and establish a high-standard network of free trade zones that is open to the whole world. This network will provide China with a greater space for development so that it can foster new strengths for participating in and leading international economic cooperation and competition.

7.2.2.3

Bring the Opening-Up to Greater Breadth and Depth

An important trend in world economic development after World War II, especially since the start of the twenty-first century, is economic globalization. The global exports of goods and services accounted for 31% of the global GDP in 2013, up by 6.5% points from 2000. The global FDI flows reached US$2.6 trillion in 2014, 3.47

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times the figure in 2000. We must build a new system for an open economy and promote a new round of opening-up. This will lead to deeper reform and structural adjustment and enable China to improve its open economy. We must promote opening-up in more areas and implement all-round opening-up. To this end, we should take the following actions. First, we must continue to utilize foreign investment actively and efficiently, and level the playing field for domestic and foreign enterprises to compete on fair terms to make sure that China remains a top choice for foreign investment. Second, we must do a good job on development and administration of pilot zones for opening-up in the service sector, including the China (Shanghai) Pilot Free Trade Zone, the Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Qianhai of Shenzhen, the Hengqin new area in Zhuhai, and the Pingtan Comprehensive Pilot Zone in Fujian, and develop systems and mechanisms that can be replicated and promoted elsewhere. Third, we should promote further opening-up in China’s inland and border areas. Inland cities should be encouraged to open international passenger and cargo air routes and develop multimodal transportation so as to form an economic corridor that covers the east, central and west regions of China and connects the south and the north. Special measures and policies should be implemented at key borders, and in border cities and economic cooperation zones to promote personnel exchanges, logistics and tourism, which will turn these places to hotspots for opening-up. Fourth, we must further open the service industry. We should open the finance, education, culture and health care sectors to foreign investment in an orderly way. Restrictions on foreign investment in nursery, pension, architecture design, accounting and auditing, trade and logistics, e-commerce and so on should also be eased. Meanwhile, we must bring the opening-up to greater depth and base it on institutions. First, we must accelerate the negotiations for China-South Korea Free Trade Zone, the China-Japan-South Korea Free Trade Zone and the Regional Comprehensive Economic Partnership, continue the negotiations with Australia and the Gulf Cooperation Council, and expedite the negotiations with the US and Europe on trade and investment agreement. We should promote the development of Free Trade Area of the Asia Pacific, the Asia-Europe Free Trade Area, and the Asia-Africa Free Trade Area so as to create a globally-oriented network of free trade areas that covers our neighboring countries and radiates and global value chains of shared interests. Second, we should continue the negotiations for agreements concerning trade in services, government procurement and information technology, and accelerate the negotiations on new areas such as environmental protection and e-commerce. We should continue to promote trade and investment liberalization and facilitation, and strive for mutual benefit with other countries. Third, we must make further progress in cooperation at the regional and sub-regional level, such as the Mekong region, the Tumen River area, the Central Asia and so on. We should establish a mechanism for mutually-beneficial and win–win regional cooperation to accelerate regional cooperation through interaction in trade and investment and economic and technological cooperation. Fourth, we must improve the legislation and industrial policies to

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facilitate the globalization of Chinese enterprises. We should establish a comprehensive system comprising services relating to planning, implementation, platforms and consultation to support Chinese enterprises to go global.

7.2.3 Advice on Bringing China’s Opening-Up to a Higher Level 7.2.3.1

Build an Open Economy That Is Secure and Efficient

The profound changes in the domestic and international situations have raised new and higher requirements for development of an open economy in the new era. Only with an open economy that is secure and efficient, can we secure an advantageous position in the volatile international economic and trade landscape, resolve the problem of unsustainability in the open economy, and improve the development quality and level of the open economy. To this end, in the process of opening-up, we must continue to change the development model of China’s foreign trade, foster new advantages for development of the open economy, improve the overall benefits of the open economy and enhance China’s resilience against external shocks and international risks. We must establish unified and efficient mechanisms for decision-making, coordination, management and evaluation relating to opening-up, and improve the foreign trade support system and risk prevention mechanism in the open economy. The national capacity for risk prevention and control should be enhanced to safeguard the core interests of the country and industries and economic security. We should continue to attach equal importance to export and import, and better coordinate trade and industrial policies. We should transform and upgrade processing trade, promote trade in services, and make China’s exports more competitive in terms of technology, brand, quality and service. We must make full use of our advantages in utilizing foreign capital and make better use of such investment. We should combine our efforts to attract investment, technology and high-caliber professionals from overseas. We should encourage Chinese companies to go global at a faster pace and enhance their operation in an international environment so as to develop a number of world-class multinational corporations. We must enhance the contribution of the open economy to the national economy in all aspects.

7.2.3.2

Control the Key Links of International Industrial Chains

The growing trends towards economic globalization and regional economic integration have ushered in an era of global competition for industrial chains. The focus of regional industrial competition has shifted to core links of industrial chains. Industrial chains are chain-like business forms comprising various industrial sectors based

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on their economic correlation, logical relationship and spatial layout. By core links of industrial chains, we refer to links that create or result in higher value-added. Core links of industrial chains have become the most important factor that determines a country’s economic competitiveness and international influence. In this regard, we should take the following actions: First, foster and attract world-class enterprises for development of the R&D and operation links of relevant industries. To control the core links of industrial chains, the simplest and most effective method is to foster world-class enterprises. With core technologies, unique competitive edges, extensive marketing network and strong brands, these enterprises lead the global innovation, and enjoy a high market share in their respective industries, thus playing a leading role in the international market. Major developed economies, such as the US, Japan, Germany, and the UK, have a heavy concentration of headquarters or regional branches of multinational corporations and banks. Enjoying access to the bulk of the resources of these corporations and banks, these headquarters and regional branches lay a solid foundation of resources, price and management for their respective countries to control the core links of industrial chains. The US, for example, had the most large corporations in 2013 according to the Fortune 500 list that year which included 132 companies from the US. In addition, according to the 2013 (the tenth) World’s 500 Most Influential Brands published by World Brand Lab, the US ranked first with 232 brands included in the list, followed by France with forty-seven brands and Japan with forty-one brands. The UK, Germany, Switzerland and Italy ranked fourth to seventh with thirty-nine, twenty-three, twenty-one and eighteen brands respectively. The heavy concentration of world-class enterprises in the US consolidates its control over the core links of international industrial chains. A total of twenty-five Chinese brands were included in the 2013 (the tenth) World’s 500 Most Influential Brands, but none of them made it to the top 100. Considering China’s population of 1.3 billion people, China is still, brand-wise, a third world country. While choosing the core links of industrial chains fir development, we should give priorities to industries with well-developed links along the industrial chain and a certain degree of concentration of outstanding enterprises engaging in R&D and operation. For the financial sector, we should start by focusing on enhancing our competitiveness in the international market by innovation of financial services, products and derivatives, and gradually shift the focus to fostering international futures market and international options exchange. For the business service industry, we should continue to attract company headquarters and promote their engagement in actual business operation and establishment of functional departments to improve their capacity to lead and influence the international business service industry. We should start from core links in sectors such as corporate management, legal services, accounting, advertising and so on, and gradually pursue development of core links in sectors such as auditing, evaluation, science and technology, intellectual property right and so on. For cultural and creative industries, we should further attract famous creative enterprises from home and abroad, and facilitate their efforts to enhance the cultural competitiveness in the international market. We should focus on the core links in sectors such as culture and art, press and publishing, design and so on in the

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preliminary stage, and gradually shift the focus to core links of radio and television broadcasting, the film industry and other industries. Meanwhile, we must guide the transformation and upgrading of processing trade and support enterprises in creating Chinese brands and international marketing networks. We should promote trade in services, undertake services outsourced by other countries and raise the position of China’s manufacturing industry in the global division of labor. We should especially encourage the export of complete sets of large equipment including telecommunications equipment, railways equipment, and power stations to build up the international reputation of Chinese equipment. Second, develop global marketplaces to influence the global trading volume and prices. Global marketplaces, with their strong transaction functions, guide the allocation of international resources by their influences on global trading volume and prices of goods and services, thus having a strong influence on industries worldwide. The top 50 future and option exchanges are headquartered in 40 cities, the trading volume of which accounts for 98% of the world total. The future and option transactions of exchanges in London, New York, Chicago, Tokyo, Paris, Hong Kong and Singapore account for 60.7% of the world total. 85.1% of the transactions of energy futures and options are completed at exchanges in Chicago, London, Tokyo and New York, and 49.8% of the transactions of metal futures and options are completed at exchanges in London, New York and Tokyo. Global marketplaces serve as excellent platforms for their respective country to influence the trading volume and prices of goods in the international market. We should establish centers for commodity trading and price discovery in cities with good conditions such as Shanghai and Beijing, and give priorities to exchanges for factors of production and strategic resources. We must improve our capacity to influence the prices of strategic resources such as rare earth, energy, iron and steel, and have a stronger voice in trading of virtual water and carbon emissions. We should also continue to guide and support the development of the auction industry to enhance the visibility of China’s high-end cultural relics and art auctions in the international market. Third, attract international organizations to China to improve our position in formulation of international industrial standards and rules. In the post-industrial era, an important measurement of a country’s comprehensive competitiveness is its participation in formulation of international standards and rules. International organizations play a dominant role in formulation of international industrial standards and rules, thus enjoying a strong voice in most industries. They have great influences on international distribution of interests and industries. International organizations are usually headquartered in countries with international influences, especially in metropolises. In terms of the number of international organizations, the top ten cities are Paris, Brussel, London, Rome, Geneva, New York, Washington, Stockholm, Vienna and Copenhagen, eight in Europe and two in the US. As China’s profile and influence continue to increase, it is imperative that we invite some major international organizations to set up their headquarter or regional headquarter in China. At the moment, China is far behind other countries in terms of the number of international organizations based in the country. With more than

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40,000 international organizations across the world, only a few of them are based in China (The Boao Forum for Asia is headquartered in Boao, a town in Qionghai city of Hainan province, and the Shanghai Cooperation Organization Secretariat is based in Beijing). The situation has, to some extent, been a constraint on China’s opening-up, and has adverse effect on our efforts to improve the open economy. When conditions permit, China may consider planning special zones for international organizations in Beijing, Shanghai, Guangzhou and other major cities. The United Nations and its agencies can set up offices in these zones. We should also take targeted measures to attract international economic and financial organizations, and encourage international organizations in the fields of science and technology, culture, sports and so on to establish branches in China. The ultimate goal is to make China an important home to international organizations.

7.2.3.3

Make All-Out Efforts to Develop the Silk Road Economic Belt and the 21st Century Maritime Silk Road

The Silk Road Economic Belt and the 21st Century Maritime Silk Road (the Belt and Road) are major strategies adopted by China to expand the areas of converging interests between China and other countries and regions. The Belt and Road, respectively focusing on the continents and the ocean, complement each other. The initiative promotes opening-up to other countries and regions on the basis of opening-up to China’s neighboring countries. It is foreseeable that guided by the BRI, China will open wider to the outside world and engage in more exchanges and cooperation with the rest of the world, which will contribute to common development and bring more benefits to people of relevant countries. At the moment, we should make all-out efforts to create the strategic anchors of the BRI to promote its steady progress. First, we should move faster to establish the Asian Infrastructure Investment Bank (AIIB) to facilitate the investment and financing efforts relating to the Belt and Road. Infrastructure connectivity is an important foundation for implementation of the BRI. At a meeting with Indonesian president Susilo Bambang Yudhoyono in Jakarta on October 2nd, 2013, Chinese president Xi Jinping proposed that an Asian Infrastructure Investment Bank should be established to facilitate the regional connectivity and economic integration, and stated that China stands ready to provide financial support to developing countries in the region, including ASEAN countries, to facilitate their infrastructure construction. Xi Jinping also called for establishment of the AIIB at the 21st APEC Economic Leaders’ Meeting. The AIIB will serve as a powerful investment and financing platform for implementation of the BRI, and facilitate the investment and financing efforts of China and relevant countries for connectivity of facilities such as high-speed railways, ports, airports and so on. It will consequently contribute to infrastructure connectivity between these countries and provide a solid material foundation for implementation of the BRI. To gain the support of as many as possible countries, the AIIB may be headquartered in the capital of countries along the Belt and Road, such as Indonesia, Thailand and Singapore.

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Second, we should proactively promote the negotiation for the Regional Comprehensive Economic Partnership (RECP) to create a long-term institutional foundation for implementation of the BRI. The RECP, which is in line with China’s policy of building a harmonious, secure and prosperous neighborhood and conducive to enhancing the regional economic integration, will serve as a long-term institutional support for implementation of the BRI. We should take measures to enhance the political trust between the RCEP participating countries, improve their economic cooperation and political relationship, and accelerate the negotiations for the ChinaSouth Korea Free Trade Zone, the China-Japan-South Korea Free Trade Zone and the China-Australia Free Trade Zone so as to advance the RCEP negotiation. We should work out proper rules under the RCEP, especially rules to promote services trade liberalization for maximum potential benefits, to create a high-standard free trade zone open to the world. Third, great efforts should be made to upgrade the China-ASEAN Free Trade Area to lay a solid economic foundation for implementation of the BRI. China and ASEAN countries, which are all emerging markets countries in Asia, are the white hope of sustained world economic growth. Stronger economic and trade relations between China and the ASEAN is a priority in implementation of the BRI, which will contribute to development of the Belt and Road. We should proactively advance the negotiation on upgrading the China-ASEAN Free Trade Area, and promote trade liberalization as the TPP does, especially liberalization of services trade, between China and the ASEAN. China and ASEAN countries will build a community of shared future, creating an enormous space and abundant opportunities for development of both parties. After a golden decade of cooperation, China and the ASEAN will continue to join hands for common development and prosperity for another decade. Fourth, we should encourage areas along the Belt and Road to develop ports and free trade parks (ports) to serve as pilot projects for implementation of the BRI. Economic zones at ports are essential anchors for sustainable development of the Belt and Road. We must make good use of free trade parks and ports as a platform for regional cooperation, and accelerate the development of free trade parks and ports along the Belt and Road. We should remove institutional and systemic barriers and obstacles in open areas, increase market access, and promote opening-up in key areas. In the short period to come, we must focus on development of the China (Shanghai) Pilot Free Trade Zone, and manage foreign investment according to the system of pre-establishment national treatment plus a negative list. We must create a fair, open and transparent market environment and promote opening-up in more areas and at a higher level. Meanwhile, we should expedite the development of free trade parks and ports in coastal and border provinces such as Guangdong, Guangxi, Fujian, Hainan and Yunnan to create open areas that can lead the international economic cooperation and competition and stimulate the development of surrounding regions. In addition, we must vigorously support overseas economic and trade cooperation zones such as the Thai-Chinese Rayong Industrial Zone and the Malaysia-China Kuantan Industrial Park. We should also improve policy coordination with countries along the Belt and Road to further facilitate and liberalize trade.

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Fifth, we should establish service centers along the Belt and Road to safeguard their security. Route security is vital to the steady and sustainable development of the Belt and Road. We must give priority to development of service centers that safeguard the security of land and sea routes. In addition to cargo handling and resupplying automobiles, trains, ships and personnel, the service centers must ensure the security of surrounding routes so as to provide safe and convenient land and sea routes for economic and trade activities between countries. China may develop the service centers on its own or in cooperation with other countries. Alternatively, we may rent existing facilities of other countries. We can also rely on the service centers to expand the scope of the BRI.

Chapter 8

Macroeconomic Control Under the New Normal

As China’s economy enters the new normal, we have seen new characteristics in our economic development and performance. In such case, we must introduce new approaches to macroeconomic control. We should uphold the range-based approach and consider the target growth rate a median line. Early warning indicators of overheating and recession should be developed in relation to economic growth, unemployment and inflation. The targets of economic performance should be considered the median line in macroeconomic control instead of the bottom line or a lower limit, and should be adjusted moderately annually. As long as the economic indicators remain in the target range and do not hit the upper or lower limit, we must ensure the consistency of policies and have confidence in our strategies. We should not resort to short-term stimulus policies just because of temporary economic fluctuations, and should develop greater tolerance of slowdown in growth rate. Such an approach to macroeconomic control will give market entities clearer expectations and lead to greater flexibility in the reasonable range of economic performance. China will have more initiative and be more flexible in its macroeconomic control, with more space to maneuver.

8.1 Definition of Macroeconomic Control First, we need to clarify the meaning and scope of macroeconomic control. By macroeconomic control, we refer to government’s use of plans, regulations and laws, policies, ethics and other instruments to intervene in and adjust economic activities and relations so as to align microeconomic activities with the macroeconomic goals, and to rectify any deviation from such goals in a timely manner. The aim of macroeconomic control is to ensure the sustained, rapid, balanced and sound development of national economy. Initiated by economist John Maynard Keynes, macroeconomic control plays an important role in economic development of both developed and © Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_8

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developing countries. Generally, governments resort to macroeconomic control for three reasons. First, market forces are not a panacea. We mustn’t leave some areas to be regulated by market forces. In some other areas, market forces do not work. Second, even in areas where market forces play a dominant role, the effect is compromised by their intrinsic weaknesses and deficiencies, namely, spontaneity, blindness and delayed response. Third, macroeconomic control helps people realize the weaknesses and deficiencies of market forces, thus ensuring the healthy and orderly development of the market economy. Consequently, government’s macroeconomic control covers three areas. First, major areas that have bearing on national economic planning, the country’s stability and the people’s wellbeing. Macroeconomic control is required in any area that relates to national economic planning and major industries that concern the country’s stability and the people’s wellbeing. It is also required to address major issues of social stability. Second, economic areas where market forces tend to fail. Macroeconomic control should be confined to economic areas that tend to experience market failure, where macroeconomic control can play a vital role. Third, areas which are avoided by the private sector. Government should assume responsibility in areas that are avoided by the private sector and areas that require more than one single entity, or encourage private investors to enter such areas with proper measures. Second, we should have a clear understanding of the instruments and objectives of macroeconomic control. Governments mainly use economic instruments such as prices, taxes, credit and exchange rate, legal instruments and administrative instruments for macroeconomic control. In Keynesian economics, the economic instruments for macroeconomic control are categorized into two main types, namely instruments of fiscal policy and instruments of monetary policy. Instruments of fiscal policy refer to government’s fiscal strategies and measures with a view to achieving the objectives of fiscal policy, including fiscal revenue (mainly tax revenue), fiscal expenditure, government bonds and government’s investment. Instruments of fiscal policy fall into two categories, i.e., revenue and expenditure. Revenue instruments mainly refer to taxation. Expenditure instruments include purchase expenditure, covering expenditure on public works and nonproductive expenditure, and transfer payments. Instruments of monetary policy refer to measures taken by central banks to achieve the objectives of monetary policy, which are categorized into regular instruments and selective instruments. For a long period, China mainly used credit scale, cash planning and other direct instruments of monetary policy. But since1998, China has been using mainly indirect instruments of monetary policy to control the monetary aggregate. At present, China’s main instruments of monetary policy include open market operations, deposit reserve, relending and rediscount, interest rate policy, exchange rate policy, window guidance and so on. The specific content and objectives of macroeconomic control are as follows. First, design reasonable economic policies and measures. Examples include making economic and social development strategies, guidelines and industrial policies to maintain the equilibrium of aggregate supply and demand, and plan and adjust the industrial structure. Fiscal and monetary policies should be developed to adjust the proportion of accumulation to consumption, ensure a balance between the aggregate demand and supply,

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control currency issuance, and prevent inflation. Government should also develop and improve the income distribution system, taxation system and other systems that is compatible with the market economy. Second, properly use prices, taxes, credit and other economic levers to adjust the primary and secondary national income distribution, so as to guide, coordinate and control the stages of social reproduction with economic benefits. Third, make reasonable economic plans with a sound scientific base so that the economic plans can play their due role in medium and long-term resource allocation to make up for deficiencies of market forces.

8.2 Transformation Is Required in Nine Aspects of Macroeconomic Control Under the New Normal 8.2.1 Transformation of Focus from Macro Control of Domestic Economy to Using Both Domestic and International Markets, Domestic and Foreign Resources and Domestic and International Rules for Better Resource Allocation Worldwide In view of the new situation, China must give full consideration to both domestic and international markets, domestic and foreign resources and domestic and international rules in its macroeconomic control. We must keep abreast of the international economic and financial situation and the changes in macroeconomic policies of major economies, and analyze their influence on China’s macroeconomy and policy implementation. We should improve our policy coordination and communication with major economies, and participate in bilateral and multilateral economic cooperation more proactively. We should enhance our influence in international affairs, and promote reform of the global governance system. We must strive for fairer and more equitable international economic order, and create a favorable institutional environment to expand the development space and maintain the benefits of opening-up.

8.2.2 Transformation from Fixation with Economic Growth Rate to Pursuit of Better Economic Quality and Performance We must transform from the expansion of economic size and control over economic growth rate by material input, excessive consumption of resources and the environment and extensive growth to pursuit of better economic quality and performance by technology input, ecological and intensive growth. In place of blind expansion

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in scale and implementation of new projects, we should resort to market rules for structural adjustment and transformation of the growth pattern, and let the market play the decisive role. We must ensure the stable economic development so as to maintain a medium-to-high growth rate and achieve medium-to-high level of development. We must deepen the reform to remove the institutional and systemic barriers to development, resolve thorny problems in development and boost the vitality of the market. We must bring the opening-up to a higher level so as to develop new and greater space for economic development, create more development opportunities and foster new advantages in international economic cooperation and competition at a faster pace.

8.2.3 Transformation from Project Management to Formulation of Major Strategies and Plans and Policy Coordination Government must stop its involvement in management of specific projects, and focus on macroeconomic issues. We should adjust the functions of comprehensive economic administration authorities to give full play to their advantages. They should mainly engage in strategic tasks that have bearing on the broad picture, be forward-looking and focus on implementation. Government should focus on theoretical research of major issues and application of the research results, and coordinate macroeconomic policy and major policies. Government should also guide and coordinate the economic system reform, and proactively promote international cooperation. Meanwhile, we must attach greater importance to coordinated development of the economy and the society, and enhance the guiding and binding effect of strategies and plans.

8.2.4 Transformation from Management of Demand Alone to Management of Both Demand and Supply We should attach each importance to the management of demand and supply in macroeconomic control, so that the market can play a decisive role in resource allocation, and the government can better perform its function. We should rely on enterprises and the market to identify and rectify the structural imbalance. We must improve our demand management. For example, we should adjust the economic landscape with industrial development and spatial distribution plans, introduce major projects to sustain the stable economic performance, and adopt prudent and slightly loose monetary policy to maintain liquidity at a reasonable level. Meanwhile, we should lift the restrictions on supply by easing restrictions on birth and household registration, reducing capital and financial regulation, optimizing the property right

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structure of land and resources, promoting SOE reform and other measures. We must introduce system and institutional reforms, such as lowering market access barriers and cutting tax and reducing financing cost, to boost the vitality of enterprises and allow the market to play a decisive role.

8.2.5 Transformation of Focus from Pre-implementation Approval to Regulation and Services During and After Project Implementation It is imperative that both power and responsibility are delegated and that strengthening regulation and supervision must synchronize. We must introduce new approval and supervision measures, and develop a well-coordinated and inter-connected oversight system to improve our supervision. We should move faster to develop an online platform for approval and supervision of investment projects, and strengthen supervision of the central government’s budgetary investment. We must tighten oversight of market prices, improve antitrust enforcement and accelerate development of the social credit system. Approval and registration procedures must be streamlined and optimized, with services offered online and applications handled within the set time limit. Government must publish the review and approval rules and procedures and transform its role in the process to a service provider. We must abolish or delegate to lower-level governments items previously subject to State Council review and approval, and give full play to the role of government service centers by regulating administrative review and approval items and optimizing guidance. For better supervision during and after project implementation, we must establish a mechanism for oversight of the whole process, promote information sharing and collaboration between departments, and create an efficient system for supervision during and after project implementation based on big data.

8.2.6 Transformation from Factor-Driven Development to Innovation-Driven Development and Higher Total Factor Productivity As China’s economy enters the new normal, it is subject to tighter hard constraints. China’s demographic dividends are waning, and its natural resources and the environment have reached the extremes of their carrying capacity. In such cases, China must transform its economic development pattern. We must shift from extensive input of land, energy, labor and other factors of production to enhancement of total factor productivity as the economic growth driver. Following the requirement of the “Opinions on Deepening the Reform of Systems and Mechanisms and Accelerating the Implementation of the Innovation-driven Development Strategy”, China

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must transform its development model and innovate its approaches to development. Actions should be taken to level the playing field, enhance financial support, establish a market-based system, encourage application of scientific and research findings, improve the research system, expedite training and flow of personnel, promote open innovation, and improve coordination. In our reform, we should focus on creating an institutional environment that inspires creativity throughout the society and encourages innovation. We need to improve the output of factor input, and pursue economic development mainly by raising total factor productivity.

8.2.7 Transformation from Incentive Policies for Given Industries to General-Benefit Industrial Policies At the moment, China is improving its economic performance, cutting capacity, and enhancing the innovation capacity of enterprises to promote industrial restructuring and transformation. Considering the situation, we must improve our traditional industrial policies, respect economic rules and uphold the rule of law. Supportive industrial policies should be developed to improve the playing field for enterprises, strengthen IPR protection, improve industrial infrastructure, create a favorable environment for innovation, support major basic research projects, and improve information service for industries. At present, certain sectors in China enjoy preferential industrial policies such as incentive for innovation in emerging industries and environmental protection and energy conservation. We need to improve the industrial policies, and develop long-term comprehensive incentive mechanisms for innovation and competition that apply to all sectors. We must accelerate formulation of mandatory standards of technology, quality, energy consumption, environment protection and safety and strictly implement such standards. We need to improve the market environment and play down the specific industries to forestall overcapacity due to a flood of investment. We need to intensify the control of the boundaries of plans and let the market better play its role. We must avoid impractical plans with plenty of visions but few concrete measures.

8.2.8 Transformation of Focus from Investment Management to Management of Both Investment and Consumption The focus of investment management will shift from pre-implementation approval to regulation and services during and after project implementation. For investment facilitation, China will establish a well-coordinated and inter-connected oversight system of investment projects that is transparent, regulated and efficient, with preimplementation approval and related intermediary services reduced, merged and standardized. Following the requirement to transform government functions from

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approval to services by streamlining and optimizing procedures, offering online services and handling applications within the set time limit, new approval and supervision measures are introduced. One example is the establishment of a national online management platform for fixed asset investment projects, a full-coverage platform connecting the relevant authorities of all levels, to promote digitalization and greater transparency in approval. Meanwhile, we must attach importance to consumption management. For steady growth in consumption, we need to improve the consumption condition and environment, exploit the potential for increasing consumption, and accelerate unlocking the potential of consumption. We must introduce and systematically implement policies and measures to facilitate the integration of migrant workers in cities. We need to extend the coverage of essential public services such as the urban social security network, health care, education, and cultural service to migrant workers and ultimately ensure equal access to such services. We need to adjust the policies on automobile consumption to promote consumption in this area. We must vigorously foster new growth areas of consumption such as electronic information, environmental protection, rural services, green, circular economy, and community services. We need to increase investment in public services to expand effective supply and foster effective demand, and prevent slump in investment. We must break monopoly and introduce more competition into the service industry.

8.2.9 Transformation from Short-Term Economic Stimulus Policies to Macroeconomic Control Based on Market Signals In formulation of monetary policy, while ensuring stable price levels, we need to reduce the dependence on money supply and aggregate financing and improve the independence of monetary policy. For better effect of monetary policy, we need to use different policy instruments and implement the monetary policy based on market signals. To improve the effect of fiscal policy, we must expedite the establishment of a unified budget that covers all government expenditure and income to ensure that the relevant policy is implemented effectively and that there is no contradiction between the central and local governments. Meanwhile, we need to further clarify the functions and responsibilities of the central and local governments, and centralize the functions and responsibilities in relation to macroeconomic control at the central government. Considering that it is hard to ascertain the potential economic growth rate, we should play down the target economic growth rate. We should attach more importance to data about employment, prices, exchange rate, industrial outlook and other areas to determine whether the economic performance is within a reasonable range and whether the economic growth rate is close to the potential growth rate. We must ensure that the macroeconomic control is in the right direction. We must have a clear understanding of the proper range of relevant indicators and the bottom line in macroeconomic control, and improve the macroeconomic control to keep main

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economic indicators within an appropriate range. We must maintain stable growth, and ensure that employment does not fall below the prescribed minimum level and that inflation does not rise above the projected level. We must meet the living needs of our people and guard against financial risks.

Chapter 9

Policy Advice on How to Adapt to, Grasp and Steer the New Normal of Economic Development, Promote Supply-Side Structural Reform, and Foster New Economic Growth Drivers

China’s economy has entered the new normal. Meanwhile, the country is confronted with increasingly complicated environment for macroeconomic development and growing downward pressure on its economy. To ensure long-term and steady economic growth, China must coordinate its pursuit of growth and stability and stimulate the internal driving forces for development. For macroeconomic control, the short-term goal is to maintain steady economic growth. In the long run, we should endeavor to stimulate the internal driving forces for economic development. To maintain a medium–high economic growth rate and develop toward the medium– high end, we must have an accurate understanding of the new normal, including its law of development and trend of development. We must adapt to, guide, and steer the new normal of economic development. We need to improve macroeconomic control, combine the efforts to address temporary problems with resolution of deepseated enduring problems, and implement the long-term strategies in macro control in the short run. Meanwhile, we should focus on the basic factors driving economic growth. We must promote supply-side structural reform to foster new driving forces for steady growth, and to improve the quality and effect of economic growth. These are essential measures to reverse the economic downturn and maintain sustained, steady and sound economic development. The Central Economic Work Conference in 2015 drew up plans for all aspects of the economic work in 2016, giving priority to supply-side structural reform. This conference has far-reaching significance, in that it started a major transformation in China’s macroeconomic control approach: a shift from focusing on demand management to management of both demand and supply, with more emphasis on supplyside structural reform. It means that the priority of China’s macroeconomic control will gradually shift from short-term measures to shore up the market and maintain stability to improving the quality and effect of development in the medium and long run. More emphasis will be placed on improvement of quality and efficiency of the supply system and strengthening the driving forces for sustained growth. The conference established a comprehensive framework of theories about supply-side structural © Social Sciences Academic Press 2021 J. Wang, A Preliminary Study on the New Normal of China’s Economy, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-5336-0_9

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reform, the core of which is five major tasks and five major policies. Starting from the conference, the socialist political economics with Chinese characteristics began to take shape.

9.1 Background of the Supply-Side Structural Reform As emphasized by General Secretary Xi Jinping, “now and in the future, China’s economic development is facing and will encounter problems on both the supply side and the demand side, while major problems exist in the former”. The Central Economic Work Conference in 2015 also pointed out that supply-side structural reform is a major innovation to adapt to and steer the new normal of economic development, a choice we have made to adapt ourselves to the new demands of international competition in the aftermath of the global financial crisis, and an essential requirement of the new normal of economic development. Over the past three decades, China has maintained an average economic growth rate of nearly 10% in its reform and development. Such growth is mainly driven by five factors. First, the enormous demographic dividends unleashed from the growing size and changing structure of labor force. Second, rapid accumulation of human capital as a result of high household expenditure on education. Third, rapid accumulation of physical capital thanks to enormous market demand and high investment rate. Fourth, fast technological progress and improvement of the total factor productivity as a result of latecomer advantages. Fifth, the great benefits of reform and opening-up and other institutional innovation. These factors are all closely related to improving supply efficiency and stimulating the driving forces for growth. The domestic and international economic and financial situations have been increasingly complicated since 2008. Many new characteristics, problems and trends have emerged. The downward trend in the medium and long-tern potential growth rate of China’s economy is obvious. The economic downturn is a result of cyclical factors, but has its root in structural factors. Viewing from the perspective of the industrial structure and the structure of factors, the efficiency of resource allocation and supply of factors has both been decreasing. The slow progress in reform of relevant systems, the declining growth rate of the total factor productivity due to insufficient innovation capacity and the increasing resource and environmental constraint also have adverse impact on economic growth. To sum up, the downward trend in China’s economic growth rate is attributable to multiple factors. The Central Economic Work Conference in 2015 pointed out that “understanding the new normal, adapting to it, and guiding its development are the prevailing logic in the present and future stages of China’s economic development”. Under the new normal, China is facing increasing pressure due to economic slowdown and the need to pursue economic transformation and upgrading. Its previous macroeconomic control approach, with excessive dependence on macro control on the demand side and the short-term analysis framework comprising investment, consumption and exports, can no longer meet the requirement of the current situation. Such approach

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cannot ensure the realization of medium and long-term goals of economic and social development either. China has reached a decisive stage in building a moderately prosperous society in all respects. Meanwhile, we are in an important period of strategic opportunity for development. Based on a keen understanding of the situation, the CPC Central Committee and the State Council proposed the vision of innovative, coordinated, green, open and shared development at the Fifth Plenary Session of the Eighteenth CPC Central Committee. The vision serves as guideline for the following five years, according to which China should strive to improve its areas of weakness so as to build a moderately prosperous society in all respects in 2020. Since the global financial crisis in 2008, China’s economy has entered a new normal featuring slowdown in growth rate, economic restructuring and shift of driving forces for development. Meanwhile, the problems of imbalance, incoordination and unsustainability have become increasingly prominent in China. The imbalance in China’s macro economy and waning driving forces for development impede the implementation of the vision of innovative, coordinated, green, open and shared development proposed by the CPC Central Committee. There is a wide gap between the current situation and the people’s aspiration for further development. Problems mainly exist in five areas: First, the long-time structural imbalance has not been reversed. The structural problem has become even more prominent under the new normal. The major problem with the current economic performance in China is that the supply structure is not compatible with the changes on the supply side and in the supply structure. Imbalance is observed in several areas. First, imbalance in industrial structure. Development of the three sectors have remained unbalanced, leading to declining efficiency of resource allocation. China’s primary sector is established on a weak foundation and lacks competitiveness. The secondary sector is big but not strong, placing too much reliance on heavy and chemical industries, without core technologies or competitiveness. Moreover, the secondary sector consumes substantial resources and energy, and causes severe damage to the environment. Overcapacity is found in many industries of the secondary sector. The tertiary sector, which is crucial to improvement of economic efficiency, has been developing at a slow pace for a long period, accounting for a small proportion of the economy. Second, the urban–rural imbalance. The advancement in integrated urban and rural development has been slow. A wide gap remains between urban and rural residents in terms of their per capita income and access to public services such as social security and health care. The free flow of labor and other factors of production is yet to be attained. Third, imbalance in regional development. There is still room for improvement in the role of market forces in national distribution of productive forces. The distribution of productive forces and the plans for functional zones should be better coordinated. We also need to improve the cooperation mechanism to promote the coordinated development between regions. Fourth, imbalance in income distribution. The market-oriented primary distribution system is not well regulated, and the wages and salaries for workers is too low. The government-guided secondary distribution system also calls for improvement because of the limited income adjustment effect of taxation and the underdeveloped

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social security system. Fifth, imbalance between investment and consumption. The financial consumption rate is excessively low, while the investment rate is too high. The general government sector accounts for a large share of the final consumption expenditure, while the household sector accounts for a small proportion. In addition, there is a wide gap between the consumption expenditure of rural and urban households. Sixth, imbalance between domestic and foreign demands. With heavy dependence on trade, China’s trade surplus will continue to rise significantly. Its foreign exchange reserve will also continue to grow. Seventh, imbalance in the structure of factors of production. China’s working age population and its share in the total population have been decreasing. The supply of capital has decreased as a result of the fall in savings rate. Second, the advancement in reform of relevant systems has been slow. China’s strategic planning, especially top-level design, is hindered by a lot of deep-rooted institutional and systemic barriers and outdated institutions and systems. This is also the case in the reform of many key areas and systems, such as transformation of government functions, income distribution, financial system, resources and the environment, social security, SOEs, and opening-up. The deep-rooted institutional and systemic problems are interwoven with the structural problems, making the situation even more complicated. Third, the growth rate of the total factor productivity in China has decreased due to insufficient innovation capacity. China falls behind the developed countries in innovation, with major flaws in its innovation system. The spillover effect of technology import is on the wane. Owing to many factors, China can no longer make innovation by introduction and imitation of foreign technology. Chinese enterprises are still followers in terms of innovation. There is no mechanism for training of innovative talents and no incentive mechanism for such talents. The existing technological innovation capacity in China cannot satisfy the requirement of economic and social transformation and development. Fourth, the resource and environmental constraint in China has been on the rise. The supply of marginal increment for land is greatly depleted, the hard constraints of energy and other resources are rising, leading to its growing dependence on foreign resources. Environmental pollution issues such as smog, pollution of drinking water, and heavy metal accumulation have become hard constraints on production, posing grave threat to the life and health of our people, and leading to negative externalities on economic growth. Fifth, immediate actions are required to improve the areas of weakness in relation to the people’s lives. The progress in improving the people’s sense of happiness and sense of gain has been much slower than economic growth in recent years. Problems relating to people’s livelihoods in areas such as education, employment, housing, income, social security, health care, production safety, food and drug safety and urban security remain unsettled. We must improve our work in these areas during the Thirteenth Five-Year Plan period. In view of the above problems, the CPC Central Committee emphasized on many occasions that China must promote supply-side structural reform. We need to summarize our successful experience, clearly understand the outstanding problems, and can

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change our mindset of economic governance. We must get rid of the path dependence on demand management and attach more importance to the supply side. We must break the supply-side constraints to unleash the potential for growth and foster new driving forces for growth. Nonetheless, to attach importance to supply-side management does not mean that we are to give up demand management. Instead, we are shifting from focusing on supply management to equal importance to management of both supply and demand. In the short run, we still need to address the excessive expansion and shrinkage on the demand side with countercyclical measures and instruments. Demand management and supply-side reform have different impact on economic performance. Demand management focuses on the fluctuation of high-frequency data, aiming for effect in the short run with instruments of fiscal policy and monetary policy. Supply-side reform, on the other hand, focuses on the internal driving forces for economic growth in the medium and long run, such as the long-term influence of labor, capital, land, natural resources, technology, institution and other factors. Policy instruments for supply-side reform include demographic policy, development of the market of factors of production, industrial policy, technological progress, changes in institutions and so on. Demand management and supply-side reform are both components of the macroeconomic governance system. Neither of them is to be neglected.

9.2 The Supply-Side Structural Reform and the Efforts to Foster New Driving Forces for Development Should be Guided by the Five Concepts of Development, Namely Innovative, Coordinated, Green, Open and Shared Development Planning for the following fives, the Fifth Plenary Session of the Eighteenth CPC Central Committee pointed out that development is the absolute principle, and that we must seek development in a scientific way. Based on in-depth analysis of the basic characteristics of the environment for China’s development during the Thirteenth Five-Year Plan period, the session decided that China remains in an important period of strategic opportunities for development, but there has been a major change to the nature of such period. China is facing both favorable conditions and risks and challenges in its development. The world economy is still undergoing profound changes in the aftermath of the global financial crisis. Countries are showing divergent trends in growth, structure, economic cycle, and policies. The US, Japan and Europe are recovering slowly from the recession, while the emerging economies and developing economies have experienced divergent growth and slowdown in growth rate. The world economy has entered a “new mediocre” featuring low growth rate, low interest rate, low inflation and low employment in most countries.

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China has entered the new normal of economic development featuring shift of growth rate, structural upgrading and shift of driving forces. Meanwhile, we are confronted with daunting challenges posed by a great many problems and interwoven risks and dangers. We are facing explicit risks such as overcapacity in the traditional manufacturing industry, growing non-performing assets in the banking industry, increasing local government debt and the real estate bubble. Potential risks also give cause for concern, and increase the uncertainties in China’s economic and social development. For example, China must deepen the reform and adjust its economic structure while its economy is under increasing downward pressure. Other factors may also expose China to new risks, such as abnormal fluctuations in China’s financial market and the consequent negative impact, reversal of international capital flows as a result of the expectation of interest-rate hike in the US, greater volatility in the international financial market and risks relating to international policy coordination. Potential risks also include the possibility that is likely to be excluded from new major investment and trade rules in a long period and that the international commodity markets may remain sluggish in the medium and long run. Based on the above analysis, the Fifth Plenary Session of the Eighteenth CPC Central Committee required that we must adhere to the vision of innovative, coordinated, green, open and shared development. The said vision of development aims to address the imbalance in China’s macro economy, the waning impetus for development, and other areas of weakness in China’s economic and social development. It is about the development ideas, direction and focus of China in the Thirteenth FiveYear Plan period and longer term. Drawing upon China’s experience of successful development over the three decades since reform and opening-up, it represents a brand-new understanding of the domestic and international situations and the law of development in China. The vision of development sets the direction of development, and play a comprehensive, decisive and far-reaching role in the process. It is not only original in wording, but also represents a major theoretical breakthrough. In practice, the vision of development will guide our efforts to promote the supply-side structural reform and foster new driving forces for development. It is the core of the theory of development in the socialist political economics with Chinese characteristics. As pointed out by General Secretary Xi Jinping, the concepts of innovative, coordinated, green, open and shared development proposed at the Fifth Plenary Session of the Eighteenth CPC Central Committee offers a solution in a context when China has entered the new normal of economic development and the world economic recovery remains sluggish. We must uphold the new development concepts as the guideline. Innovative development is about shift of China’s growth driver from input of factors of production to enhancement of total factor productivity. Under the new normal of economic development, we must resort to innovation to enhance the internal driving forces for economic development. In the future, innovation will occupy a central place in China’s development strategy. Enhancement of innovation capacity will boost the efficiency of the input of factors of production, and create new impetus for economic development.

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Coordinated development is an integral aspect of sustained and healthy economic development. By promoting coordinated development, China will attach more importance to the quality and effect of economic development. Coordinated development will contribute to China’s resolution of long-time problems such as imbalance, poor coordination and unsustainability. We should expand China’s space for development and ensure sustained its development by strengthening the weak links in economic and social development. We must promote coordinated development between regions and integrated development of the rural and urban areas. We must promote coordinated material and cultural progress, coordinated development of the economy and national defense and coordination in other areas. We should pursue balanced and coordinated development in all respects in China to improve our soft power and hard power. Green development is in essence about sustainable development. The core of green development is to properly handle the relationship between development and resources and the environment, placing greater emphasis on ecological and environmental protection. Green development which will contribute to the coordination between economic development and environmental protection. It will also facilitate the upgrading of industrial structure from low-to-medium level with heavy dependence on consumption of resources and the environment to medium-to-high level that relies on technology and services. In the Thirteenth Five-Year Plan period, we must adhere to the vision of green development and improve ecological protection to address the pressure and to ease the constraints of resources and the environment. The concept of open development covers a broad scope in view of the new situation. It means that China will be more proactive in opening-up. In addition to consolidating its position in trade in goods, China will also promote opening-up in investment, international cooperation in manufacturing capacity for equipment and other areas. Following the concept of open development, China will develop an open economy of higher level, during which process it will coordinate domestic and foreign demand, balance imports and exports, give equal emphasis to bringing in and going global, and attract investment, technology and outstanding professionals from overseas. In future opening-up, China will provide the developing and underdeveloped countries and relevant international organizations with public goods such as necessary financial support, personnel, institutions and facilities. This will enable China to have more say in formulation of rules in global economic governance, and build a boarder community of shared interests and future. The concept of shared development promotes inclusive development, and attaches great importance to all-round development of humanity. It represents the idea of people-oriented development, the principle of which is that development is for the people and by the people, and its benefits are shared by the people. We must ensure that all the Chinese people benefit from the country’s development. We need to strengthen areas of weakness relating to people’s livelihoods and social undertakings, and promote coordinated and balanced development. We must improve social undertakings in the areas of education, science and technology, culture and health care so as to give the people a stronger sense of happiness and sense of gain while contributing

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to the development and sharing the benefits of development. For shared development, we also need to establish long-term mechanisms for development and coordination which are well conceived and sustainable. Such mechanisms will encourage all people to contribute to the shared development, and facilitate the resolution of relevant issues relating to people’s livelihoods. The above five concepts of development is based on China’s development practice and experience. They also represent China’s advance in development theory and a better understanding of the law of development. We must uphold these new concepts while planning for economic and social development in the following five years, and adhere to the scientific approach to development. We need to resolve difficulties in development, strengthen the impetus for development, and foster new strengths. We must place greater emphasis on the quality and effect of development and accelerate the structural reform to foster new drivers for development. We must ensure the sustained and sound development of China’s economy, and ensure its steady development in the critical and difficult period of economic structural adjustment, transformation and upgrading. We must strive to achieve fairer and more sustainable development that is of better quality and higher efficiency.

9.3 The Supply-Side Structural Reform in Five Areas Is Vital to Implementation of the Five Concepts of Development We must implement the five concepts of development proposed by the CPC Central Committee, which will help resolve the imbalance in economic development and strengthen our areas of weakness in development. For implementation of these concepts, it is vital that we should embrace new ideas of economic governance. We need to get rid of the path dependence on demand management, and make efforts on the supply side. This will further remove supply constraints, unleash the potential for growth and foster new drivers of growth. The Central Economic Work Conference in 2015 required that we must vigorously promote structural reform and resolve deep-rooted problems that constrain China’s development. In our efforts to promote supply-side reform and foster new drivers of economic development, we should give priority to work in the following five areas.

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9.3.1 We Need to Reap More Benefits of the Reform in Key Areas and Give Full Play to the Guiding Role of the Reform in These Areas in Deleveraging Financing, Reducing Costs, Guarding Against Risks, and Boosting Efficiency and Economic Growth Reform is the greatest source of benefits for China’s economy, and it has enabled China’s rapid economic and social development. At the moment, China’s traditional growth model is under increasing pressure, and China is confronted with the daunting challenges of the middle-income trap. It is imperative to deepen the reform and promote institutional innovation to enhance its internal driving forces of development and stimulate the enthusiasm, initiative and creativity of all people. We must continue to deliver benefits of our institutions, and foster fresh impetus for China’s economic development. It takes courage, wisdom and resilience to push forward the reform. To deepen the reform, we must root out inertia, incompetence, wait-and-see attitude, procrastination and perfunctoriness, making excuses, nonfeasance, nominal reform, and other passive and opportunistic behavior. We need to make major breakthroughs in key areas, and vigorously promote the reform of major systems such as the fiscal and taxation system, the financial system, the land use right, investment and financing, SOEs, the education system, and the science and technology system. We must move faster to draw up plans and rules for the reform that are of major structural significance, and implement the plans and rules. We must remove all obstacles to ensure the implementation of the reform plans. The core of supply-side reform in China, which is also the most challenging task, is the reform of systems. We need to promote reform in the following systems and areas to reduce government intervention, bring down the explicit and implicit costs of enterprises, and invigorate the micro economy. First, we must deepen the reform of administrative review and approval system. We should further streamline the government and delegate power, significantly reduce administrative review and approval procedures, and improve supervision and services during and after project implementation. At present, the local governments must strive to implement such reform measures. They need reduce the unnecessary nontax burdens on enterprises, continue to streamline administration and delegate power, and create a favorable business environment based on rule of law. The major reform measures proposed by the CPC Central Committee must be implemented. Second, the SOE reform will boost the efficiency of operation and management, and address the soft budget constraint on SOEs, making SOEs market entities that are held responsible for their own profits and losses. One of the tough tasks in SOE reform is to accelerate the mixed-ownership reform. We need to make greater efforts to encourage private investment in monopoly industries, enhance the return on invested capital, promote free competition by the reform of systems, and improve the efficiency of resource allocation. There is still a big room for improvement of the investment quality and efficiency in China. For higher efficiency in formation and

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allocation of social capital, we must focus on improving the capital formation efficiency. We should deepen the reform of the investment regime, promote market-based financing channels, and establish market-oriented mechanisms for capital increase of enterprises. We must implement the negative list system to invigorate the private capital. The SOE reform also aims to remove zombie enterprises which own a great amount of resources to reduce overcapacity and deleverage at the micro level, thus improving the profitability of SOEs. Third, in the reform of the fiscal and taxation systems and the financial sector, we may influence China’s economic development from the supply side via changes in macroeconomic policies. Deepening the reform in these areas also reduces the tax burden and financing cost of enterprises and contributes to the reform of the supply side. In further reform of the fiscal and taxation systems, we should start from the tax reform. We need to gradually reduce the proportion of indirect taxes, and establish and improve a system for direct taxes, of which the taxation subjects are property and behavior of the residents. In addition, we must transform our policies that are nominally proactive but conservative in essence. For implementation of a more proactive and vigorous fiscal policy, we need to implement larger-scale tax cuts to reduce the burden of taxes and fees on enterprises, and eradicate excessive taxation that is against the law. Fourth, for comprehensive advance in the reform of the financial sector, we need to remove the financial repression, improve the multi-tiered financial market system, and resolve the outstanding problems that have long plagued China’s financial market, such as structural imbalance, inadequate functions and financial repression. The aim is to give better play to the role of the financial system in mobilizing private capital and raising the savings rate so that it can better support the real economy. We must improve the financial market system and create a more stable market environment. Following the principle that the financial sector should support the development of the real economy, we should make good use of both existing and additional financial resources, and avoid funds circulating within the financial sector without entering the real economy. Commercial banks should make use of and adjust the structure of existing credit resources, and reduce loans to industries with excess capacity to accelerate debt deleveraging in these industries. We need to adopt different approaches in different sectors, ensuring and supporting the loans to some sectors and restricting the loans to others. We should prioritize major projects, emerging industries of strategic significance, small and micro enterprises, and work on agriculture, rural areas and rural residents in allocation of loans, and make good use of idle government funds. We should make continuous efforts to phase out outdated production capacity, reducing the leverage of enterprises, and remove zombie enterprises for economic structural adjustment. This will take a long time, and is likely to result in massive layoff in SOEs. Therefore, we must advance the reform of the urban and rural social security systems and improve such systems, making sure that the social security systems adapt to the changing economic and social development. We should weave an extensive and strong net to ensure the people’s wellbeing. To this end, we must constantly raise the standards of wages, old-age pension, unemployment, workplace safety and medical insurance and subsistence allowance.

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To sum up, for shift of the economic development drivers, it is essential to promote comprehensive reform centered on reform of the administrative system and higherlevel opening-up at home and to the outside world. We must attach great importance to risks, difficulties and uncertainties, guard against any attempt to stop or reverse the reform, and take proper measures to address over expectations of the reform. Meanwhile, governments of all levels and all departments must make concrete efforts to implement the reform plans. We need to get rid of institutional inertia and overcome the objections from interest groups. The further reform must be more systematic, integrated and coordinated. Aiming for breakthroughs in building a law-based government, we must improve people’s awareness of rule of law. Meanwhile, we must respect the role of market forces, transform the functions of government, and reduce the government’s direct control and undue intervention in the economy. The establishment of a mechanism for incentive compatibility between government officials of all levels is vital to the implementation of plans for supply-side reform. We should bring into full play the enthusiasm and initiative of all local governments and sectors, and put an end to inertia, incompetence, wait-and-see attitude, procrastination and perfunctoriness, making excuses, nonfeasance, nominal reform, and other passive and opportunistic behavior. We must put an end to institutional inertia and overcome the objections from interest groups, and create an atmosphere in which officials are ready and eager to try, and able to try and deliver real outcomes, so as to facilitate the implementation of reform plans and contribute to the sustained and sound development of the economy.

9.3.2 We Should Implement Deeper Tax Cuts to Give Full Play to the Role of Tax Policies as a Bridge Between Demand-Side Policies and Supply-Side Reform Judging from the perspectives of economic transformation and the demands of residents, the macro tax burden in China is too heavy, and there is still room for tax cuts. The demands for tax cuts from enterprises and the household sector have been rising. The government, on the other hand, is under great pressure and faces a lot of challenges, as tax cuts can barely stimulate production and stabilize the growth in a period of economic downturn. Theoretically, however, tax reduction is an important instrument for countercyclical regulation when the economy is going downward. Tax cuts bring down the production costs of enterprises, and raise the after-tax profit margin of labor and capital, thus stimulating the increase in supply of labor and capital and promoting the potential increase in output. Tax cuts are also conducive to stimulating the resident’s consumption and invigorating the economy. Tax reduction results in short-term decline in the government’s tax revenue. But as the reduction in taxes have effects on the supply side and lead to new tax sources and expanded tax base, in the long run, it will lead to increase in the government’s tax revenue, according to the Laffer curve.

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The conditions in China are not yet ripe for comprehensive tax cuts, but it is feasible and imperative that we should implement larger-scale tax cuts for individuals, small and micro enterprises, growth enterprises and start-ups. We must stop excessive taxation that is against the law, and bring down government-imposed transaction costs. We should reduce the undue burden of fees and taxes on enterprises, and cut the contributions of enterprises to social insurance scheme. We should bring down the financial costs, electricity price, logistics costs and so on for enterprises. To facilitate the entrepreneurship and innovation of residents and enterprises and invigorate the economy at the micro level, we also need to further integrate taxes and reduce the taxes in the consumption.

9.3.3 We Should Make More Use of Market Forces, Proactively Address Overcapacity, and Adjust and Improve Our Industrial Policies to Improve the Environment for Competition in China In promoting supply-side reform, we have five major tasks, i.e., cutting excess capacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness. The central task is to cut excess capacity, which is essential to sustained and sound development of China’s economy. Phasing out excess capacity, especially outdated capacity, is crucial to the long-term steady development of China’s economy. Addressing overcapacity will enable enterprises to make more profits by lowering the leverage ratio of enterprises and improving the capital efficiency. It is also conducive to industrial optimization, reorganization, upgrading and transformation. In the medium and long run, on the supply side, we need to resort to both administrative power and market forces to address the issue of overcapacity. While making more use of market forces, we should integrate our efforts to cut excess capacity with formulation of the Thirteenth Five-Year Plan, and give full play to the guiding role and binding effects of industrial plans, policies and standards. We must strengthen the administration of market access and improve the guiding and regulation effects of industrial policies to eliminate outdated capacity at the source. To phase out outdated capacity, we must make good use of existing resources and foster emerging industries. We should proactively encourage the investment of resources in promising industries to facilitate the transformation to intensive growth. Openingup can also help address the issue of overcapacity. In the process of promoting the BRI, we should increase our outbound investment, expand foreign demand, deepen international capacity cooperation and export capacity with comparative advantages. The government should shift its role and improve the assessment of official’s performance, which will help curb the blind investment and undue intervention of the local governments.

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Meanwhile, we must improve our industrial policies and take measures to encourage industrial upgrading. At present, certain sectors in China enjoy preferential industrial policies such as incentive for innovation in emerging industries and environmental protection and energy conservation. We should transform such policies to long-term comprehensive incentive mechanisms for innovation and competition that apply to all sectors. We should improve the market environment and play down the specific industries to forestall overcapacity due to a flood of investment. We need to transform and upgrade the traditional industries with advanced technologies. We should promote extensive technological transformation to combine modern information technology with the manufacturing industry and to facilitate the development of medium and low-end industries towards the high end. Meanwhile, we must continue to implement the Internet Plus Initiative, advance the building of Digital China, develop the sharing economy, and support internet-based innovation in all forms. We should integrate internet-based innovation with all sectors of the economy and the society, with a view to enhancing the creativity and competitiveness of the real economy, facilitating its transformation and upgrading, and improving the quality and efficiency of economic development.

9.3.4 We Should Deliver Benefits by Innovation and Accelerate the Implementation of the Innovation-Driven Development Strategy to Promote Technological Progress, and Shift the Growth Driver from Input of Factors of Production to Innovation and Enhancement of Total Factor Productivity Science and technology are the primary productive forces. Technological progress is the fundamental driving force for economic development. Innovation is a pivotal factor that enhances the productive forces and the country’s comprehensive strength, and a brand-new engine driving sustainable development. As a result of the new normal of economic development in China and the rising technological and industrial revolution worldwide, the previous driving forces for China’s development are obviously waning. The old growth model with heavy dependence on expansion of production capacity and size cannot ensure sustainable development, and it is no longer feasible to drive development by increasing input of labor and other factors of production. We need to rely more on industrial upgrading to the medium–high end for economic growth, and shift the growth drivers from input of factors of production and investment to innovation. We must consider innovation the core in the broad picture of national development. We should create new impetus for economic development by improving our innovation capacity and the comprehensive efficiency of the input of factors of production. To effect the shift of driving forces, we must stimulate people’s creativity and enthusiasm for innovation, and improve the total factor

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productivity. We must make innovation the top priority in China’s development and a strong impetus for China’s economic upgrading. Actions should be taken to create an enabling environment of fair play. We need to enhance financial support, establish a market incentive mechanism, facilitate financing and reduce taxes and fees. We should encourage the application of innovation results, improve the systems for research and education, promote cooperation between enterprises, universities, and research institutes, and accelerate the training and flow of personnel. We must promote open innovation and coordination. To sum up, we must change our ideas about development, and pursue economic development mainly by raising the total factor productivity. For implementation of the innovation-driven development strategy, we must enhance our capacity to innovate. We must increase the expenditure on science and technology and improve the application of technological advances. We should endeavor to make major innovation in basic research and major breakthroughs in key technologies, and facilitate industrial development with technological innovation. We must take measures to promote enterprise’s motivation for innovation so that they will play a principal role in decision-making in relation to technological innovation, spending on R&D, organization of research and application of innovation results. We must improve our institutions and systems, create an enabling environment for innovation, resolutely remove all obstacles in systems that have impeded the enhancement of the capacity to innovate, and strengthen protection of IPR. We need to foster an environment and systems that encourage enterprises to make innovation, and develop systems and institutions that encourage innovative talents to emerge. We must retain innovative people and improve our incentive mechanisms to accelerate the development of a large pool of innovative professionals. We must discover, foster and retain capable people throughout the whole process of innovation. We must strengthen international cooperation, and proactively integrate into the global network of innovation to improve China’s international cooperation in technological innovation in all respects and foster a new landscape of collaborative and open innovation.

9.3.5 We Should Continue to Make Full Use of China’s Demographic Dividends and Foster New Advantages in This Regard, Especially Advantages in Human Resources Human is the most active element in productive forces, and human resources are the fountainhead of economic development. China’s greatest advantage lies in, and will remain its human resources. Without steady supply of labor, both consumption and investment will be unsustainable in the long run, like a river with no headwater or a tree with no roots. Owing to the changes in demographic structure, China has witnessed a decline in working-age population. As a result, China no longer has

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a distinct comparative advantage of low labor costs. In future development, China faces two major demographic risks, i.e., population decline and population loss. To counteract the adverse impact and potential harm of low fertility rate in China, we must improve the allocation of labor force to reverse the weakening trend of the influence of production factors due to population aging. We should take measures to raise the labor force participation rate and to improve the structure of labor force. Meanwhile, we must attach importance to improving the quality of labor force and accumulation of human capital. It is vital that we must create new demographic dividends. We should take innovative measures to increase the size of working-age population and improve their quality, accumulate human capital, and improve the efficiency of resource allocation through transfer of labor force from agriculture to non-agricultural industries. Such measures will create alternative advantages in capable personnel or human capital, thus counteracting the adverse impact of the weakening influence of production factors. We should take action in two areas. First, we need to continue to adjust and optimize the family planning policy. The focus should shift from controlling population size to encouraging fertility and improving quality of population. We must boost the fertility rate among young people to reverse the declining trend of fertility rate. The adjustment of the family planning policy is a strategic measure with immediate benefits, which has been adopted with a longterm picture in mind. Second, we should accelerate urbanization. We must reform the household registration system and lift the restrictions on flow of labor force to facilitate the flow of labor force between regions and sectors. Third, we need to improve the quality of education and put more efforts into training. We must increase our spending on human capital and improve the quality of labor force. We should especially attach great importance to living labor so as to encourage innovation.

9.4 Policy Suggestions for Fostering New Drivers for Growth to Ensure Sustained, Steady and Sound Development of the Macro Economy 9.4.1 Properly Handling the Relationship Between the Government and the Market and Letting the Market Play a Decisive Role in Resource Allocation According to the Third Plenary Session of the Eighteenth CPC Central Committee, the economic system reform is the focus of deepening the reform comprehensively. The underlying issue is how to strike a balance between the role of the government and that of the market, and let the market play a decisive role in allocating resources and let the government play its functions better. The market’s role in allocating resources is changed from “basic” to “decisive”. With only one word altered, the market’s role was redefined. “Decisive role” is a continuation and extension of “basic role”. The

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proposal to let the market play a decisive role in resource allocation represents a new breakthrough in CPC’s understanding of the laws that underlie the development of socialism with Chinese characteristics and a new achievement in adapting Marxism to China’s conditions. It also marks the beginning of a new stage in development of the socialist market economy. Government functions and market forces both have advantages and disadvantages. The role of the government and that of the market are neither isolated nor contradictory, but form a synergy. Letting the market play a decisive role in resource allocation and letting the government better perform its functions doesn’t mean that the market can replace the government’s functions, nor vice versa. As we have learned from the past three decades since reform and opening-up, it is essential that we properly handle the relationship between the government and the market and improve the socialist market economy so as to invigorate the market entities and ensure the sustained, sound development of the economy. The Third Plenary Session of the Eighteenth CPC Committee decided that we must deepen economic system reform by centering on the decisive role of the market in allocating resources, adhere to and improve the basic economic system, and speed up the improvement of modern market system. We must accelerate our efforts to implement the decision. To this end, we should properly handle the relationship between the government and the market, and stimulate the enthusiasm of all people. We should start by transforming the government’s functions to deepen the reform and deliver more benefits of institutions. We must accelerate the reform of fiscal and taxation systems, the financial system and other systems that is conducive to sustained, steady growth of consumption. We must let the market play a decisive role in resource allocation and let the government better perform its functions to deliver new institutional dividend for economic development. The government must improve the top-level design while crossing the river by feeling for the stones. We should improve our institutional arrangements to ensure that businesses of all forms of ownership enjoy equal access to production factors and market competition. We should accelerate the transformation of the government’s functions from direct involvement in organization of resource allocation, pursuit of investment and implementation of projects to mainly providing public services and creating a better environment for development. Meanwhile, to invigorate various economic entities, we must give better play to the role off the market in resource allocation and revealing efficient economic organizations. We should make full use of the collective learning mechanism of the market to provide all participants of the economy with a platform so that they can learn by trial and err, make full use of existing opportunities and create new ones. A unified, open market system featuring orderly competition is essential to the decisive role of the market in allocating resources. China’s socialist market economy has been developing for more than two decades, but there are still quite a number of problems and drawbacks that inhibit the vitality of market entities and prevent the laws of the market and value from fully playing their roles. If there problems are not solved properly, it will be difficult to establish a well-developed socialist market economy, transform the development model, and adjust the economic structure.

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We must remain committed to the reform to establish and improve the socialist market economy and bring the reform to a deeper and wider level. We should reduce the government’s direct involvement in resource allocation and its direct interference in micro-economic activities. We should step up efforts to build a unified, open market system featuring orderly competition, and set fair, open, and transparent market rules. The government should refrain from getting involved in economic activities that can be effectively regulated by the market, and let the market do what the government is not supposed to do, so that the market can play its role of maximizing the effectiveness and efficiency of resource allocation, and enterprises and individuals can have more room to develop the economy and create wealth with vigor and vitality. We must speed up the establishment of a modern market system in which enterprises operate independently and compete on an equal footing, consumers make choices and spend of their own accord, and commodities and factors of production flow freely and are exchanged on equal terms. We should remove all market barriers to make resource allocation fairer and more efficient. First, we should set fair, open, and transparent market rules. We must implement a unified market access system, which allows all market players to enter equally and legitimately into areas that are not on the negative list. Second, we should improve the mechanisms where prices are determined by the market. The government should refrain from interference where the market can determine the prices. The government should confine its role of determining prices to public utilities, public services and areas that are naturally monopolized, and improve the pricing transparency by placing it under public supervision. Third, we must reform the market regulation system. We should unify the market regulation, and eradicate rules and practices that inhibit the establishment of a unified national market and fair play. We must prohibit and impose punishment for illegitimate favorable policies, and combat local protectionism, monopoly, and unfair competition. Balanced macroeconomic control and effective governance are the intrinsic requirements for giving full play to the strength pf the socialist market economy. To ensure that the government better perform its functions, we must transform government functions, deepen the reform of the administrative system, use new administrative methods, improve the macroeconomic control system, and enhance the monitoring of market activities. We must strengthen and improve public services, promote social fairness, justice and stability, and pursue common prosperity. Governments at all levels should exercise administration strictly in accordance with the law, and conscientiously fulfill their responsibilities. The government must manage well all matters that fall within its purview, and appropriately delegate powers that should be delegated. The government make resolute efforts to avoid overstepping its authority or failing to play its due role.

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9.4.2 Speeding Up the Reform of the Income Distribution System, Adjusting the Income Distribution Structure, and Addressing the Widening Income Gap It will take a long time to resolve the issue of wide income gap and ease the conflict in income distribution. We must establish an appropriate, fair and equitable income distribution system to address this issue. To this end, actions should be taken to improve the primary, secondary and tertiary income distribution. The market, the government’s macro control and the private sector should play a dominant role respectively in primary, secondary and tertiary distribution. In the reform of the income distribution system, we must adhere to the guiding principle of expanding the size of the middle-income group, adjusting excessive incomes, and ensuring the minimum income. We should endeavor to narrow the residential income gap to make sure that the benefits of reform and opening-up are shared by all the people.

9.4.2.1

Improving the System for Primary Income Distribution

The system for primary income distribution is a fundamental way for market forces allocate resources. We should strive to improve the market system so as to improve the primary distribution. With a set national income, the increase in wages and salaries for workers will lead to declining income of enterprises and the government in primary distribution. We should take the following measures to improve primary distribution. First, establish mechanisms of pay rises. We need to improve the legislation to develop systemic rules and laws on appropriate long-term mechanisms of pay rises and introduce new principles of pay rises that are compatible with the social and economic development, increase in enterprise’s profits, and fluctuations of prices. We must establish and improve news release systems for income benchmark, price of labor in the market and labor costs. We should establish a salary survey system that covers all enterprises and all types of jobs to provide workers with salary data, which will facilitate the flow of labor force and contribute to the establishment of a mechanism for regular pay rises. We should especially pay attention to the salary and pay rises of employees of collective enterprises, private enterprises, and other small and micro enterprises. We need to establish a long-term mechanism for regular pay rises of rural migrant workers, and ensure the pension of retired employees of enterprises. We must establish a mechanism for regular pay rise and adjustment to ensure people’s access to reasonable salary and pension. Second, raise the proportion of wages and salaries. We should increase wages and salaries by judicial and administrative means. We must implement and improve the minimum wage system and establish mechanisms to ensure enterprise employee’s income according to the Provisions on Minimum Wages issued by the Ministry of Labor and Social Security. We must attach great importance to supervision and examination, and adjust the wages according to the economic situation and enterprise’s

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profits. Meanwhile, considering that small enterprises in China are labor intensive and operate in comparatively poor environment, tax cuts for small enterprises will help create new jobs and raise wages. We should also establish mechanisms for coordination between regions, industries and enterprises, and give better play to the role of trade unions in balancing the interests of parties concerned. Trade unions of private and foreign-funded enterprises play an important role in the mechanism for coordination in relation to wages. Third, increase people’s property income. We need to standardize the capital and real estate markets. We should improve the capital market comprising stocks, bonds, futures, insurance and other products. We should introduce more types of securities and take other measures to promote the comprehensive, sound and balanced development of the capital market. We must strengthen regulation over the real estate market, and control the housing price within a reasonable range, so that more people not only have access to affordable housing, but also receive more property income from lease and transfer of housing. We must ensure farmer’s rights to dispose of, manage, transfer and profit from land, so that they can receive property income from land. Fourth, strengthen the adjustment and supervision of income distribution in monopoly industries. We must further promote separation of government administration from management of enterprises and institutions. For better adjustment and supervision of income distribution in monopoly industries, we should give top priority to abolishment of systems that give rise to administrative monopoly. We need to introduce competition into monopoly industries, and separate business activities with no natural monopoly. We should promote competition between workers and encourage the flow of personnel so as to promote the establishment of competition mechanisms in monopoly enterprises. We must establish open and fair pricing mechanisms for products and services of monopoly industries by hearings and other measures.

9.4.2.2

Improving the Secondary Distribution Dominated by the Government

In income redistribution, we aim to remedy market failures, ensure social equity and justice, and improve the sense of solidarity that underpins the development of the economy and the society. To this end, we must reform the fiscal and taxation systems, and make greater efforts to adjust the distribution of income to high-income population. Meanwhile, we need to adjust the structure of fiscal expenditure to spend more on public services and improve the social security for low-income population. We should take the following actions: First, strengthen the role of the taxation system in adjusting income distribution. We should establish a taxation system that combines the advantage of the comprehensive tax system and that of taxation based on specific categories of income, which is in keeping with the situation in China. Personal income tax is usually progressive. Flat progressive rates should be applied to labor income, while capital gains tax

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should be levied based on the specific category of income. To expand the tax base in China as much as possible, except for non-taxable incomes and incomes that are exempt from tax as specified in the tax law, all incomes should be subject to income tax. We should create conditions for introduction of estate tax and gift tax in China. Second, improve the social security system. To ensure that all labors have equal access to social security, we must move faster to improve the social security system and make it available in both rural and urban areas. We should promote the coordinated development of social security in rural and urban areas, accelerate the integrated development of rural and urban areas, and eliminate inequality in social security between rural and urban areas. We need to accelerate the building of a nationwide network of social security. For establishment of a unified national social security system, we must put in place a unified institution and system for administration of social security and unify the financing and payment standards for businesses of all forms of ownership and employment. Third, improve the fiscal transfer payment system. While determining the fiscal capacity and expenditure need of the local governments and the amount of transfer payment to be made, we must consider both the subjective and objective factors having an influence on fiscal expenditure and revenue, so as to ensure that the government’s current transfers are based on law and procedures. In formulation of reform plans that concern the fundamental interests of the Chinese people, we must give full consideration to the interests of farmers. We need to improve policy support for agriculture, rural areas and farmers, and increase government spending on compulsory education in rural areas. We should provide more public goods and improve the quality of public services in rural areas. We should boost the income of farmers. Fourth, strengthen supervision of off-the-books income and crackdown on illegal income. We must improve the legislation to firmly ban illegal income, and use legal means to regulate government official’s part-time job, bonds and securities, and wages and salaries. We must formulate and make good use of antitrust law, antiprofiteering law, corporate law, insurance law, product quality law and other laws and regulations to regulate market activities. We need to regulation off-the-books income to ensure income transparency, and inflict severer punishments against tax cheating and evasion. We should establish a transparent management system to improve the management and supervision of extrabudgetary funds.

9.4.2.3

Giving Full Play to the Role of the Third Income Redistribution

The tertiary distribution is conducted through donation and other means on the basis of free will. It remedies deficiencies of the primary and secondary income distribution. As the tertiary distribution is underpinned by morals and ethics, it plays an irreplaceable role that is unattainable through regulation by market forces or the government. In this area, we should introduce the following measures: First, moderately lower the threshold for establishment of foundations and improve the credibility of charitable organizations. We should adjust the threshold for establishment of foundations, encourage organizations and individuals to participate

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in philanthropic work and public service when they have such intention, and promote the development of non-government charities. We need to improve the supervision of donations and publish the use of donations for public supervision so as to enhance the credibility of charitable organizations. Second, improve the tax deduction policies for charitable donations to give full play to the role of taxation in encouraging charitable donations. So far, tax deduction is only applied to donations by enterprises and individuals to eligible beneficiaries as prescribed in the existing laws, which dampens enterprise’s enthusiasm for donation and impedes the growth of charitable donation in China. We need to adjust the tax deduction policies for charitable donations, and increase the deductible amount of donations to facilitate the implementation of such policies. Third, promote philanthropic culture based on traditional Chinese culture. We can find a lot of philanthropic thoughts in traditional Chinese culture, such as the emphasis on benevolence and “do reverence to the elders in your own family and extend it to those in other families; show loving care to the young in your own family and extend it to those in other families”. We need to raise the public awareness of philanthropy, and help people realize that charitable donation is the social responsibility of each enterprise and individual instead of something concerning only the rich. We should launch philanthropy courses and volunteer programs in schools and universities to develop caring students with strong sense of responsibility.

9.4.2.4

Deepening the Reform to Boost Income Growth

For resolution of deep-rooted problems in income distribution, the key is to deepen the reform so as to create necessary conditions and a favorable environment for China to adjust income distribution and to boost income growth. In this regard, we suggest that the following actions should be taken. First, accelerate the integrated development of rural and urban areas. We should increase government spending on infrastructure in rural areas and backward areas, giving priorities to supply of water, gas and electricity, road construction and housing. In rural areas, we need to provide farmers with essential facilities of life and production. We must ensure their access to safe drinking water, improve the reliability and capacity of rural power grids, speed up road construction, build the natural gas pipeline network, exploit clean energy and renovate dilapidated buildings in rural areas. The government should increase its spending on basic education and health care in rural areas, making sure that every rural child has access to education and that rural residents have affordable access to health care. Efforts should be made to extend the social security and urban housing security systems to cover eligible migrant workers, and enable the continuation of social security for migrant population outside the administrative area of original registration. We must make sure that migrant population and residents with urban household registration are treated equally in application for and distribution of basic housing, including low-rent housing and affordable housing, and have equal access to housing security.

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Second, make more efforts into work relating to agriculture, rural areas and farmers. In China, the agricultural productivity is 28% of the productivity in the secondary and tertiary sector, and the per capita income of rural residents is 31% of that of urban residents. The fundamental solution to narrowing the income gap between rural and urban residents is to improve the agricultural productivity. The key in this regard is to accelerate agricultural modernization and the transfer of rural labor to non-agricultural industries. We should promote the free flow of production factors between the urban and rural areas to transform farmer’s usufruct rights over contracted land, homestead, forests and grasslands to their main sources of property income. We should allow transfer of land use rights for profit to increase farmer’s income. Third, promote coordinated development between regions. The government should increase fiscal support to ensure equal access to basic public services of all regions. The key is to improve the system for equalization transfer payments. General transfer payments play a dominant role in balancing the income and expenditure of local governments. We should increase the proportion of general transfer payments in the fiscal expenditure of the central government. Meanwhile, we should gradually transform irregular special transfer payments to general transfer payments, and make the latter the main form of transfer payments. We should significantly increase the proportion of government expenditure on public services in the central and western regions and the northeastern region to ensure improvement in compulsory education, basic medical service and old-age insurance in these areas. The aim is to narrow the excessively wide gap in basic public services between regions and consequently narrow the widening income gap between regions. Fourth, increase government spending on education to ensure equal access to education. The government should increase its expenditure on education in the rural areas and the central and western regions. We must ensure equal access to education and promote the flow of education resources between rural and urban areas. Especially, the government should increase its expenditure on basic education, make sure that children from low-income families complete the compulsory education, provide financial support to students of junior colleges and technical schools from low-income families, and improve the system for student loans. In addition to promoting qualityoriented education, we must attach great importance to vocational education and training. We should provide training for farmers, unemployed people and laid-off workers to promote the integration of training with employment. Fifth, pursue justice and equity in income distribution. Equity and efficiency are two main objectives in social development. In the process of building of a harmonious society, we must attach importance to both economic efficiency and social equity. We should strike a balance between efficiency and equity in both primary and secondary distribution. Efficiency is the driver for sound development of the economy and the society. Equity is the anchor of the society and a source of endless impetus for economic and social development. Equity represents essential values of human society. We must ensure equal access to labor opportunities, and make sure that the implementation process of rules and the results are fair and open. We should let the market play the decisive role in allocation of labor.

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9.4.3 Improving the Housing Supply and Security Systems, and Defusing Risks in the Real Estate Market 9.4.3.1

Improving the Housing Supply System

In view of the conditions in China, we should build a housing supply system for the government to provide basic housing security and for the market to satisfy multilevel housing demands. While making every effort to increase the housing supply, we must attach great importance to satisfying the people’s demands for better housing. We need to establish a sound system of housing standards so that houses are economical, affordable, eco-friendly, energy-conserving and safe, and advocate a housing consumption mode fitting China’s conditions. We must properly handle the relationship between public services provided by the government and services provided by the market, between the economic and social functions of housing supply, between needs and possibilities, and between the need to provide housing security and the need to avoid total welfare dependence. According to the Twelfth Five-Year Plan, the number of basic-need housing units to be built and houses in run-down areas to be renovated should amount to thirty-six million, and the basic-need housing coverage should reach around 20% in 2015. We should focus on the development of publicrental housing, move faster to build low-rent housing, and accelerate the rebuilding of houses in run-down areas.

9.4.3.2

Improving Supporting Policies for Housing

We should give full play to the supportive, guiding and leading roles of such policies, and maximize the enthusiasm and initiative of all sectors. We should improve the land policy, give priority to ensuring that land is used to enhance the people’s wellbeing. We should develop a balanced land supply plan, increase residential land supply, and give priority to allocating land for building basic-need housing. We need to improve our fiscal policy and use more public funds to build such housing. We should adopt policies and measures to encourage enterprises and other institutions to build and manage public-rental housing. We should also actively explore systems and mechanisms for non-profit organizations to build and manage basic-need housing, so that all side involved can join forces in this endeavor. We must strengthen management of such housing and establish procedures for its entry, use and exit so as to ensure equal access to public resources. We must make sure that basic-need housing is fairly allocated, and that the people who are entitled to it get it. We must stop illegal acquisition of such housing, and block institutional loopholes in this regard. Those who acquire basic-need housing illegally must be punished in accordance with laws and regulations.

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Forming a Unified Market of Construction Land in Urban and Rural Areas

A unified market of construction land in urban and rural areas is an intrinsic requirement of the socialist market economy. We should reform the system for use of collective land for construction in rural areas according to the requirement of coordinated development in urban and rural areas. Providing that it conforms to the planning, we should put business-related collective land for construction in rural areas on the market and make sure that such land is treated equally as state-owned land for construction. We should gradually form a land pricing mechanism that responds to market supply and demand, resource scarcity and the cost of environmental damage, and a price system for collective construction land in rural areas that goes hand in hand with the land price system in urban areas. We must give full play to the decisive role of the market in allocating land to gradually form a unified, open and orderly market of construction land in urban and rural areas that encourages competition.

9.4.4 Ensuring and Improving the People’s Living Standards, and Enhancing Their Sense of Happiness and Sense of Gain The ultimate goal of economic and social development in China is to enable our people to lead a happy life. We have made great progress in economic and social development since reform and opening-up. The improvement in people’s sense of happiness and sense of gain, however, has been much slower than the economic growth rate, and falls short of the people’s expectation. It is an important task in economic and social development during the Thirteenth Five-Year Plan period to ensure and improve the people’s living standards, improve the people’s lives and facilitate the well-rounded development of everyone, so as to enhance the people’s sense of happiness and sense of gain. We should focus on work in the following areas. First, firmly implement the strategy of reinvigorating the country through science and education, and always give priority to education. We should increase our investment in education, promote universal and life-long education, and create an atmosphere in which the people enjoy learning. We should strive to ensure that every citizen, especially every child, has equal access to education so that they can acquire the ability to develop themselves, contribute to society and help others. We should put more efforts in the reform of the systems for science and technology and education, and create a relaxed atmosphere that facilitates education based on student’s capabilities, encourages innovation, individuality and well-rounded development of the people. We should change the exam-oriented education, and attach great importance to improving the people’s quality, especially to improving their scientific literacy. We should encourage the development of innovators and maximize their enthusiasm

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for innovation. We should pool talents from across the world and put them to the best use to develop large human resources who are innovative and ready to take risks. Second, unlock the potential of employment and implement more proactive employment policies. Employment is the cornerstone of the people’s wellbeing. Full employment is a prerequisite for and a foundation of steady increase in resident’s income, sustainable economic growth, and continuous improvement of the people’s lives. As China’s economy has entered the new normal, its job market will remain tight. Therefore, in macroeconomic control, we must give high priority to employment and implement more proactive employment policies. We should adopt targeted fiscal, tax and financial policies, and improve the systems and mechanisms for promoting employment and entrepreneurship. We need to enhance the government’s capacity for public employment services and improve the employment services system to increase employment through multiple channels. We must vigorously promote the development of the service industry which has great potential for employment so as to create more and better employment opportunities and improve the employment rate and the quality of employment. We should improve the quality of labor force and adjust the structure of human resources in light of the adjustments to the industrial structure so that the supply and demand of human resources are well coordinated. We should increase job opportunities for young people, especially university graduates, and encourage entrepreneurship, especially among young people. We should give full play to the role of small and micro enterprises, and invigorate such enterprises with deeper tax cuts. Third, deepen the reform of the income distribution system, and make every effort to increase the people’s income. We must adhere to the guiding principle of expanding the size of the middle-income group, adjusting excessive incomes, and ensuring the minimum income. We should let the market play a leading role in primary distribution, and give full play to the role of government’s macro control in secondary distribution. We must narrow the income gaps, and strive to make sure that individual incomes grow in step with economic development, and that pay rises in tandem with increases in labor productivity. We should raise the share of individual incomes in national income and that of wages and salaries in primary distribution, making sure that the achievements of reform and opening-up are shared by all the people. We should improve the size and performance of our capital market and increase the property income of rural and urban residents to bring about the wealth effect of growth in consumption. We should also encourage the development of secondary and tertiary sectors in rural areas to diversify channels for increasing the income of farmers. We should make great effort to advance the reform of rural land system to increase farmer’s property income. Fourth, continue to increase government spending in areas relating to the livelihoods of the people, improve the social security system in rural and urban areas, and improve the supply and management of basic-need housing. We should put in place a sustainable, multilevel social security system with universal coverage and relevant institutions that ensure the people’s basic living standards and help those most in need. The social security system must adapt to the economic and social development and changes. We should make continuous effort to raise the pay, the benefits

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of old-age insurance, unemployment insurance, work injury insurance and medical insurance, and subsistence allowance, and extend the coverage of such benefits. We should improve and implement the emergency aid system, and improve the welfare and social security systems and the corresponding services. We need to increase the subsistence allowance in rural and urban areas, and give priority to guaranteeing the basic living needs of low-income population. We should do our best to develop a tightly woven and sturdy net of social security to guarantee the basic living standards of the people. We must continue to conduct market-oriented reforms to fully invigorate the market, and accelerate the development of housing security and supply systems to meet the people’s needs for basic housing and other multilevel needs for housing. Fifth, move faster to improve the basic healthcare system, and deepen the healthcare reform. We should continue to improve the basic medical insurance for rural and urban residents, and implement the serious disease insurance for rural and urban residents nationwide. We should deepen the comprehensive reform of communitylevel medical and healthcare institutions, carry out the comprehensive reform of county-level public hospitals across the country, and launch comprehensive pilot projects for deepening healthcare reform at the provincial level. While upholding the principle of letting the market play the decisive role in allocation of resources, we should properly control the prices of medical services. The government should stop setting prices for most pharmaceuticals, and gradually lift the pricing control over medical service. We must put an end to the practice of funding hospital operations with profits from overpriced drugs, lower extortionate drug prices on medicines, and form a proper pricing mechanism for drugs and medical services in order to ease the financial burden on the people. We should also make progress with the reform in related areas and strengthen the supervision during and after the pricing process. We must maintain a good order in the drug and medical market and ensure that the low-income population have access to basic medical services. We must lower the drug prices while improving the quality of medical services, and develop a sound medical insurance system. Sixth, attach great importance to workplace safety and food and drug safety, and establish and improve a safety net. Life is previous. Development means nothing if we do not place sufficient emphasis on safety and take measures to guarantee safety. We are confronted with a challenging situation in the fields of workplace safety and food and drug safety. In recent years, there have been many serious safety incidents which have threatened the people’s lives. We mustn’t pursue development at the cost of lives. To meet the people’s desire for a better life, we must first ensure workplace safety in all fields and food and drug safety throughout the production process. We must raise public awareness that safety comes first, implement the workplace safety responsibility system, and improve the capacity-building for workplace safety. We must establish a sturdy safety net to prevent man-made disasters, relieve the suffering of victims of natural disasters, and guard against serious accidents. In the Thirteenth Five-Year Plan period, in addition to maintaining steady and sound development of the economy, we must put the people first and do our best to address the most practical problems of the greatest and most direct concern to the

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people, such as education, employment, income, social security, healthcare, and food safety. We should ensure equal access to basic public services, gradually establish public services and a social security system that match the economy of China, and move faster to narrow the gaps between regions and groups of people. We should significantly improve the people’s living standards, enhance their sense of happiness and sense of gain, and make sure that more achievements of reform and development are shared by all the people in a fair manner.

9.4.5 Building an Open Economic System, Fostering New Advantages for Participating in and Leading International Economic Cooperation and Competition 9.4.5.1

Attaching Greater Importance to Foreign Demand

Increase the value added of our exports, promote the upgrading from assembling and processing to R&D, design and other high-end stages of the value chain. We should make great efforts to undertake services outsourced by other countries, enhance the technological content and value added of trade in services, and gradually open the market of the service industry. We should promote liberalization of trade in goods and services, and encourage enterprises to develop international markets, especially the emerging markets with great potential. We need to improve the environment for foreign trade. We should use various policies and measures, including fiscal and financial ones, to expand our export. We should reduce the government approval required for foreign trade enterprises and cancel undue tax and fees to further improve trade facilitation. We should improve the platform for foreign trade information and establish a global trade information system to help enterprises guard against risks in foreign trade. We should put more effort into bilateral and multilateral negotiations to bring down the loss of enterprises caused by trade barriers. We should moderately devalue the renminbi, which will enhance the competitiveness of Chinese enterprises in export, boost our export, secure our position in the international market, and mitigate the pressure on monetary policy in our efforts to maintain sustainable growth.

9.4.5.2

Further Lifting Restrictions on Foreign Investment and Opening Wider to the Outside World

It has been two years since the China (Shanghai) Pilot Free Trade Zone was founded. Its successful experience should be copied nationwide as soon as possible. To open wider, we should accelerate the negotiation with the US on bilateral investment and trade, and implement the negative list system to allow foreign investment in more areas. We should also further open the inland and border areas. In view of

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the thriving development of China’s border trade with neighboring countries, crossborder transport and energy transmission channels, we should adopt new policies to open the central, western and northeastern regions wider. Such policies should enable these regions to make full use of both domestic and international markets and resources for development, better integrate into the world economy, and enhance their competitiveness in the international market.

9.4.5.3

Ensuring Coordination in Bilateral, Multilateral, Regional and Sub-regional Opening-Up and Cooperation, Accelerating Implementation of the FTZ Strategy, Promoting Connectivity with Our Neighboring Countries, and Enhancing Our Capacity to Guard Against International Economic Risks

To accelerate implementation of the FTZ strategy, in the short run, we can take actions in two areas. First, we should combine the FTZ strategy with the BRI and proactively negotiate with the countries and regions along the Belt and Road on establishment of free trade zones. Second, we should accelerate implementation of the APEC accord reached at the meeting in Beijing to promote the establishment of the FTAAP. We should enlist the support of India and Russia, and proactively communicate with the US to push forward with the negotiation for the FTAAP so as to form the largest regional trade agreement and gradually improve our capacity to participate in the formulation of international trade rules and our performance in this regard. Third, where conditions permit, we should support the establishment of overseas economic and trade cooperation zones, cross-border economic cooperation zones and other forms of economic parks, and encourage Chinese enterprises to make investment and seek cooperation in other countries. In the medium and long run, we should uphold the rules of the world trade system, and continue bilateral, multilateral, regional and sub-regional opening-up and cooperation. We should seek more common interests with other countries and regions, accelerate the implementation of the FTZ strategy based on cooperation with our neighboring countries, and speed up the establishment of the Asia free trade area. We should carry out reforms in the management systems for market access, customs supervision, inspection and quarantine, accelerate the negotiations on emerging issues such as environmental protection, investment protection, government procurement and e-commerce to form a high-standard global network of free trade zones.

9.4.5.4

Accelerating the Building of Free Trade Parks and Ports

We should expedite the building of the China (Shanghai) Pilot Free Trade Zone, continue to conduct pilot projects in the zone, promote the reform and development by opening-up, and take the lead in establishing cross-border investment and trade rules that are governed by law and up to the international standards. The pilot zone should serve as an important platform for China to further integrate into economic

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globalization, where the market plays a decisive role in resource allocation, and the experimental field of China’s further reform and opening-up. It should explore practices that can be replicated in other parts of China, so as to serve as a demonstration and play a leading role nationwide. The pilot zone should explore new means and practices to facilitate the country’s effort to deepen the reform in all respects and open wider.

9.4.5.5

Encouraging Chinese Enterprises to Increase Overseas Investment

We should encourage Chinese enterprises to go global, play a part in the global supply chain and better integrate into the globalization in order to expand China’s foreign trade and opening-up both in scope and depth. The central government should allocate special funds to encourage outbound direct investment, and we should support Chinese enterprises in this regard by loans with interest-subsidized loans, insurance subsidies, information consulting and other services. The chambers of commerce and associations should give more guidance to enterprises on outbound investment, and establish partnership with their foreign counterparts and mechanisms for dialog. We should encourage more competent Chinese enterprises to make investment overseas in order to expand our foreign demand, ensure the supply of commodities and break the multi-national companies’ monopoly on prices and supply. At present, we may focus on work in the following areas. First, promote greater cooperation with Brazil in soybean trading and build overseas soybean production centers in Brazil. Second, work together with countries rich in non-ferrous metals to build economic and trade cooperation zones, or increase the supply of such metals from overseas through investment, risk exploration and technological cooperation. Third, encourage Chinese enterprises, especially private enterprises, to go global at a faster pace and make investment in foreign financial markets as shareholders, or even controlling shareholders, of public companies in the resources industry. While purchasing resources from overseas, we may consider forming institutional investors and obtaining the support of local conglomerates to reduce risks in transaction and improve the chance of success. Meanwhile, within the G20 framework, we should appeal to all relevant parties to establish a global governance mechanism that can stabilize the energy and resources market, formulate fair, equitable and binding international rules, and develop mechanisms for information sharing, price coordination, financial regulation, emergency response, reasonable consumption and free and open trade and investment in relation to the energy and resources market.

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Improving Policy Coordination and Cooperation with Other Countries, Seeking New Growth Drivers, and Creating a New International Economic Order

Confronted with low growth rate, high unemployment rate and high debt ratio, all countries are working to turn the corner. Economic growth of a few countries cannot lift the global economy. The problem is that countries focus on formulating their own economic policies, without necessary, effective coordination in policies between each other, and the economic relations between major economies are divergent. For example, the US and the UK have witnessed considerable economic growth, while the situation in Japan and Europe is not so good. Under such circumstances, to enable strong, sustainable and balanced growth of the world economy, all countries must join hands to address the impact of geopolitics on the economy, guard against new global financial crisis, curb the widening trend of the gap between the rich and the poor, further reform the global governance system, strengthen international cooperation, and find new means to restore the international economic order.

9.4.6 Unleashing the Enormous Potential for Wealth Creation in the Private Sector and Inspiring the Vitality of Mass Entrepreneurship To adjust the economic structure and ensure sustainable development, China must stimulate private investment as soon as possible and improve the efficiency of capital formation and allocation. To this end, the government should further transform its functions by streamlining administration and delegating powers. We should implement the negative list system and delegate all powers that should be delegated to stimulate the creativity of all market entities. We should focus on implementation of policies, clarify the existing policies in detail and resolve the problems arising in implementation of such policies. We must give full play to the leading role of the reform to break monopoly, remove hidden barriers, allow private investment in more areas, and promote market-oriented financing so as to boost the confidence of private investors and enhance the return on invested capital. We must establish a market-based and market-driven system. We should let the market decide the new technologies, products, and forms of business to be developed, and the new growth pattern and areas. We should accelerate the upgrading of traditional industries and the development of emerging industries. We must create conditions to enable all people to contribute their knowledge and creativity.

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China is now facing new opportunities and challenges. We must take measures to invigorate the market entities, promote the flow of the factors of products and accelerate the reform in all areas. We must unleash the potential of the Chinese people, inject vitality to the market, create growth drivers by innovation, and deliver more benefits through the reform. The aim is to create a steady flow of endogenous driving force for the sustained and sound development of China’s development which will ensure the vitality of China’s economy even in trials and tribulations.

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