General trends in economic transformation and upgrade

  Time:2016-06-20   Hits:0

General trends in economic transformation and upgrade

Chi Fulin

Published on Friends of Europe 


The 13th Five Year Plan (FYP) period (2016-2020) is critical for China’s modernisation and growth. By 2020, China should have made considerable progress in the economic restructuring and transformation of its growth model. During this period, China will further these efforts to overcome the risk of the middle-income trap and build a moderately prosperous society in all respects.


Structural reforms and institutional innovation are the sources of economic vitality. In the 13th FYP period, the economic transformation China is advancing will bring new trends of structural upgrading and tap into the domestic demand potential. When entering the economic ‘new normal’, as well as pursuing sustainable economic development, the focus is to promote economic transformation and upgrade through structural reforms. China’s top priority is to upgrade its current economic structure through transforming and reforming the existing model, thereby laying a solid foundation for the building of a moderately prosperous society.

To successfully transition towards a service-led economy, China needs to upgrade its manufacturing industries and develop service sectors. If the share of value added of service sectors in GDP could reach around 58% of the total GDP by 2020 from the current level of 50.5%, it would result in an average annual growth rate of 8%. Industrial upgrading will increase the share of service sectors (with R&D, finance and logistics as priorities) in GDP from 15% to more than 30% by 2020; thus these sectors will become an indigenous driver for manufacturing upgrading.


The service-led industrial structure will lead the economic ‘new normal’ by creating jobs and ensuring green development. According to preliminary calculations, if the share of services in GDP could increase from 50% to 55% in the coming years, the total energy consumption in China will be reduced by 14% and carbon dioxide emissions by 18%.

By ensuring a successful transformation from physical urbanisation to population urbanisation, China will unleash new demand and new supply. If we extend the reform of thehukou system and promote equal urban-rural access to basic public services in the 13th FYP period, it’s possible that by 2020, China’s physical urbanisation rate will be as high as 60% and population urbanisation rate with urbanhukou will increase from 36.6% in 2014 to around 50%.


What is most important is to make the term ‘rural migrant worker’ become a word of the past. It is essential to accelerate the implementation of relevant policies so as to fulfil the target set by the central authorities to ensure that roughly 100 million rural migrant workers and other non-registered permanent residents in cities get urbanhukou. Deepening reform of the hukou system in the 13th FYP period should focus on the following three transformations.


Firstly, it is vital that China reforms the current system by changing the mindset and means of administration from controlling migration to managing and facilitating migration. Secondly, there should be a fundamental change from the decades-long urban-rural dual hukou system to a nationally-unified residence card system. Thirdly, residents’ management should become the responsibility of the department of population services rather than the department of public security.


In order to achieve a successful transition towards a consumption-led economy, the mainstay of consumption in China need to shift from material consumption to services consumption in the 13th FYP period. Our estimate is that by the end of 2020, the urban residents’ share of expenditure on service-based consumption will increase from 40% in 2014 to about 50% by 2020, possibly even rising to 60% in certain better developed regions.


Consumption will increase quickly during the 13th FYP period. We estimate that China’s total retail sales of consumer goods will maintain a growth rate 2-3% higher than the GDP growth, with an annual average growth of 8-9%. We predict that during the 13th FYP period, consumption will contribute about 65% to GDP growth, indicating that consumption will become the main driver of economic growth.


China has become the largest global trader of goods, but its share of service trade remains relatively low. In 2014, global service trade accounted for 20% of total trade, but China’s foreign service trade only took up 12.3% of China’s total foreign trade. Hence, we should make the growth of service trade a priority in optimising our trade structure. By 2020, the share of China’s foreign service trade in total foreign trade should reach at least 20%.


To achieve the desired results in growth, China needs to accelerate the building of pilot free trade zones (FTZs), with a special focus on promoting trade in services. Adapting to the needs of the new round of trade liberalisation process and China’s economic transition and upgrade, the four FTZs should make greater breakthroughs in service trade so that their experience can be copied and promoted across China.


It’s also essential for China to contribute to the promotion of bilateral, multilateral, regional and global free trade processes, with trade in services a priority. To expand services trade and accelerate trade liberalisation, promoting an orderly opening up of the service market and lifting export control on service trade by developed economies are key tasks if China is to expand services trade and accelerate trade liberalisation.


Research conducted on a potential China-EU Free Trade Agreement (FTA) suggests that the potential for an expansion of China-EU trade is enormous. China and the EU account for 1/3 of the world economy while total trade between them only accounts for 1.5% of the world’s total. The largest potential of China-EU trade lies in service trade. By 2020, if China’s total volume of service trade reaches $1.2tn and the share of its bilateral service trade in the total bilateral trade with the EU increases from 13.2% to 20%, the total volume of bilateral service trade will reach €200-220bn. To this end, the two sides should take the development of service trade as common priority, promote win-win cooperation in the areas of the service sector and strive to make major breakthroughs in building China-EU FTA during the 13th FYP period. Therefore, China and EU should, as soon as possible, launch FTA negotiations.


(Translated by Wei Wenfeng, Chen Luyun)

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