Without Transformation, There will be No Way out

Author:CIRD  Time:2013-07-02   Hits:0

        Chi Fulin

  June 18, 2012

  The world economy is witnessing profound and complex changes, and both developed and emerging economies are in a critical period for their economic transformation. It is becoming a consensus that without transformation there will be no way out. As a large country with its economic transition in a new phase, China is facing four major challenges: first, it needs a market that plays its role to a greater extent, but not a market ineffectively regulated; second, it needs sustainable growth, but not GDP-oriented growth; third, it needs a government efficiently facilitates the growth, but not a government that leads the growth; fourth, it needs wider international cooperation and exchange, but not trade protectionism.

  How to construct a new growth model? I think it is important to realize a more open market and to conduct more efficient structural reforms for such an endeavor. In the next few years, China’s transformation and reforms are to demonstrate the following 3 general trends.

  1. Trend of moving towards a large consumption country.

  First, China’s domestic demand is large. According to rough estimates, the total size of releasable potential consumption demand will possibly amount to 45 to 50 trillion RMB by 2020. In view of the induced investment demand, the total domestic demand may well be close to 100 trillion RMB.

  Second, adequate releasing of the domestic demand in China is to support its economy growing at a medium annual rate of 7%-8% in the next decade. According to a preliminary calculation, every one percent of consumption growth in China brings an economic growth rate of 0.76%. In the period between 2012 and 2020, the actual growth rate of urban-rural household consumption in China may be at the level between 7.66% and 8.92%, which will, together with other drivers, enable its economy to grow at an annual rate between 7% and 8%.

  Third, releasing China’s domestic demand is to boost its imports. According to some estimates, the total value of imports will be as large as around 20 trillion USD in the next decade, which would be almost twice as large as the 11 trillion USD in the previous 13 years from 2000 to 2012.

  2.Trend of urbanizing rural population

  Recently, China’s leaders have emphasized again and again that urbanization is the largest potential driver for future development. Now advancing urbanization of a new pattern has become one of the priority areas for cooperation between China and EU. Why has urbanization become an important strategic choice in China?

  First, there is a huge potential for urbanization. In 2012, China’s population rate was 52.6% but that of population urbanization was only 35.2%. In my judgment, China’s urbanization will develop at the rate of 1-1.2% annually in the next decade. Then its urbanization rate will be over 60% and its population urbanization rate will be above 50% by 2020. In the second half of this year, China will issue a master plan for advancing urbanization.

  Second, urbanization of rural population will double the size of the middle income group. At present, the proportion of the middle income group in China is only 23% of the total population, which is much lower than it should be. In the next decade, with adequate breakthroughs in institutional reforms and in deepening of income distribution reforms, the proportion of the middle income group in the total population can be raised to 40% and the total number of middle incomers will become as large as 600 million. Thus, China’s social stratum structure will take the shape of an olive.

  3.Trend of deepening market-oriented reforms

  We in China often say that reform is still the largest dividend for China’s development, because reforms focusing on streamlining the relationship between the government and market will further stimulate the creativity and vitality of market players. In the next 2-3 years, China will accelerate a package of reforms including the reform of pricing of resources and factors, market-oriented reforms of interest rate and exchange rate, reform of monopolistic sectors, reform of state-owned enterprises, reform of the taxation system, reform of the fiscal system and opening of service sectors. While deepening these market-oriented reforms, more efforts will be given to the change of the lingering government-led economic growth mode and to the innovation in mechanisms for economic operations. This essentially means that the government will delegate more power to the market, reduce items in economic sectors subject to administration approval, open rights of operating monopolistic sectors to private capital, loosening administrative regulation of pricing of resources and factors, and restrain the administrative power to reduce administrative intervention through industrial policies. In the fall of this year, China will issue a master plan for reforms in the next few years.

  In short, by continuously advancing its economic transition and releasing reform dividend, China may well create another “golden decade” for marching towards equitable and sustainable development. This is a desirable goal not only for China but also for Europe and the rest of the world.

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