China's New Path to Sustained Growth
China’s economic slowdown has raised some concerns in the past three years -- especially given the recent volatility in global equity markets. Yet if one looks into the underlying fundamentals of China’s economic growth, a different picture emerges: After a brief and inevitable period of transition, China is poised to open a new era of sustained economic growth, one that will continue to fuel global prosperity.
It is true that China’s economy is no longer growing at the almost 10 percent rate it sustained from 1979 to 2012. Yet even China’s current growth rate of 7 percent is more than twice the global average. Moreover, after three decades of breakneck growth and its emergence as the world's second biggest economy, with a gross domestic product of $10 trillion, China is not the “catch-up” economy it used to be. In many respects, it has caught up. As a result, it must change gears from high-speed growth featuring quantitative expansion to medium-to-high-speed growth that features qualitative improvement.
The good news is that this process is under way. Even while maintaining relatively fast growth, the Chinese economy is making strides in a process of structural adjustment. For example, consumption now contributes as much as 60 percent to economic growth, almost 10 percentage points higher than in 2014. Led by sectors such as information services and e-commerce, China’s service industries now account for a larger share in the economy: In 2014, their contribution outpaced that of China's manufacturing industries by 5.4 percentage points. China is also pushing forward pilot projects that seek to blend public-private ownership, opening sectors such as energy and railways to more private investment.
Moreover, it is important to remember that this new path for the Chinese economy opens up growth potential in other areas. For starters, given that China's economy is much bigger than during its first catch-up phase, a lower growth rate actually generates much greater economic output.
In that regard, Chinese consumers represent a huge growth opportunity. According to the National Bureau of Statistics of China, from 2010 to 2013, the average disposable income of the top 40 percent of earners rose more than 50 percent, from $4,753 to $7,170. The rise of China’s middle class will spur not only overall demand, but also demand for new, high-end products.
As China moves ahead with industrialization and urbanization, it will introduce a number of major projects in urban and rural infrastructure, intercity rail and highways, river transportation, energy conservation, environmental protection, and ecological building. These projects will not only stimulate greater investment demand, but also provide more and better public goods and expand the consumer market.
Of course, businesses are the main players in China’s market economy and investment. As total consumer demand grows and consumers move upmarket in their needs and tastes, businesses will have to increase investment in response. At the same time, as market reform deepens in China, competition between businesses will intensify, further increasing pressure to invest in new technologies.
There is much room for improvement on that front. In 2013, China’s per capita industrial value-added was just one-third that of the U.S. A majority of Chinese industries are still in the middle-to-low end of the global value chain. Yet this gap also points to the growth potential of Chinese industries. Generally speaking, China has the world's most comprehensive industrial system and industrial supporting capacity. New government strategies will accelerate the upgrading of traditional industries, and expand the space for emerging industries including information technology, high-end equipment, new materials and biomedicine.
China recognizes that its market reforms must be comprehensive, which is why the government is moving to streamline administration, delegate power, and encourage entrepreneurship and innovation. Already the second largest spender on R&D, China is home to enterprises and individuals who were granted 825,000 patents in 2013, accounting for one-third of the global total. Some of China's most innovative companies -- names such as Huawei, Lenovo, Alibaba and Tencent -- need no introduction.
These structural reforms and the transition to a new path of sustainable economic growth will not only benefit China’s 1.35 billion citizens, but also contribute to a global economic recovery. After all, in 2014, China was the largest trading nation and generated more than a quarter of global economic growth. The success of these reforms will also strengthen economic ties with the U.S., for whom China is already the second largest trading partner and third largest export market. The U.S. is also now the third largest destination for China’s outbound direct investment. Our two nations have their own comparative advantages. There will be increasing demand from China for high-quality services and high-tech products, and China’s outbound investment will be more active. Indeed, especially in trade in services and two-way investment, the possibilities for strengthening cooperation between China and the U.S. are almost limitless.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Li Wei at firstname.lastname@example.org
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