Academic journal article International Journal of China Studies

The Logic of Long-Term Growth of China: From New Normal to Supply-Side Reform

Academic journal article International Journal of China Studies

The Logic of Long-Term Growth of China: From New Normal to Supply-Side Reform

Article excerpt

1.Overview

The Chinese economy has experienced an average 10% growth from 1978 to 2007. This long high growth period seemed to have been interrupted by the shock of the global financial crisis in 2008 as China had to react through economic restructuring. Some concealed economic distortions in the highgrowth phase emerged to the surface when Chinese economic growth slowed down. Economic growth shifting to a sub-high gear is accepted as the new economic development stage or so called "new normal" officially defined by President Xi Jinping.

On May 2014, President Xi Jinping enunciated the concept of "new normal" which he regarded positively as a strategic opportunity. At the opening ceremony of the APEC Business Leaders Summit in November of the same year, President Xi elaborated on the "new normal" formally with three features such as lower growth rate, economic restructuring and innovation-driven growth. A month later, in December, at the Economic Work Conference of 2014, Xi provided a comprehensive explanation of "new normal" and expanded its notable features from three to nine (Guo, 2016).

The nine changes now occurring in China are as follows. First, consumption demand becomes more diversified. Second, investment is switched to new areas with new techniques, products, industries and business modes. Third, China's exports and balance of payments now reflects both inflow of foreign capital and outflow of domestic capital synchronously. Fourth, novel industry organizations are characterized by miniaturization, artificial intelligence and specialization. Fifth, economic growth depends more on human capital and technical progress than on the quantity of physical inputs. Sixth, market competition has transformed from quantityoriented to quality-oriented. Seventh, resource and environmental constraints require changing the way of economic development and emphasizing more on environmental friendly and sustainable development. Eighth, various types of hidden risks gradually emerge in line with economic slowdown, but remain under control. Ninth, the mode of macro-control has to change from demand stimulus to balancing the relationship between supply and demand; a more scientific mode of macro-control labelled supply-side reform or supply-side structure reform. Hence, given these characteristics of China's development in current stage, also fitting the trends of the world economy, the "new normal" in nature reflects the aspects of Chinese economic restructuring. To capitalize on the logic of China's long-term growth, policy makers should recognize and adapt to the "new normal", then take proactive action in the new development stage. These are the basic tasks of China's economic development in the current and coming periods.

In theoretical terms, what is the nature of the "new normal"? Why do these changes happen and what is the difference between the "new normal" and the old one? Under the circumstances of the "new normal", what have changed, and what have not? What is the logic that links the "new normal" to the supply-side reforms in China? This paper tries to answer these challenging questions.

The following parts are organized as follows. Section 2 discusses the main performances and some stylized facts of Chinese economic slowdown in the long run. Section 3 explains why and how Chinese economic growth slows down in pace with restructuring process after the crisis shock occurred. The paper intends to show that economic scale plays an important role in the process of recovery which is fuelled up by Internet penetration. Section 4 focuses on the nature of the "new normal". Rapid change of relative factor prices when a country transits from the low-level development to the high-level maybe the key to understand the logic of long-term growth. The argument that the relative comparative advantages hold constant may not be correct and could mislead the country slipping into the "middle-income trap"1. Dynamic comparative advantages are from the flexible price system without any distortion. …

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