Macroeconomic Momentum

According to a joint study by experts from Chinese and American think tanks, there are three prominent changes in China’s economy at the new development stage.

The first is the change of the country’s advantage in cost. The average costs of doing business in China have increased, which means the former low-cost advantage no longer exists. As a result, it will be increasingly challenging for industries that relied on low-cost advantage to continue developing.

The second is the change in the international market. Over the past 40 years, China’s economic development was largely dependent on the globalized economic environment. Exports and direct investments in China played a significant role in its economic growth, but now these two drivers are losing momentum.

The third is the change in China’s population structure. The aging population will bring enormous challenges in the years to come.

In addition to these three aspects, digital technology and green development are areas where China’s economy is undergoing significant changes. All of the changes mean China’s economy has entered a new stage of development.

How should China respond? The book China 2049 tries to find an answer to this question. This book is an achievement of joint research conducted by the National School of Development of Peking University and the American think tank Brookings Institution. To summarize the conclusion in one sentence: China’s future growth model will undergo a transformation.

To transform the growth model, China must switch its existing policies to rely more on innovation, the domestic market, and digital technology. The core of the transformation is to move from extensive growth based on the past low-cost advantage to innovation-driven growth.

Enhancing innovation capability

Currently, China is undergoing great changes and the international market and environment too are very different from what they were in the past. For example, in the past, no matter how many products China exported, no one thought of them as a big problem. But now exports of China’s “new three” products alone – electric vehicles, lithium batteries, and solar cells – have made some countries worried. However, in the complex international environment, such as the “small yard and high fence” strategy adopted by the U.S., opening up to the outside world is particularly important for making innovations. Staying enclosed will only make things worse.

To cultivate innovation ability, it is necessary for China to keep opening-up. Western countries possess a lot of advanced knowledge and technology. If China just backed away due to some restrictions, it may cause bigger problems, and affect or even hinder its scientific and technological progress. Of course, China can rely on itself to tackle major scientific problems, but in today’s world, no country can completely rely on its own strength, nor can any country claim to master all cutting-edge technologies. Cooperation is important. So, staying open is crucial, and in today’s world where there are increasingly prominent geopolitical conflicts, it is crucial to fully recognize this.

China should do more to maintain the vitality of its private enterprises. China’s private enterprises are competitive innovators. How to enhance and maintain the confidence of entrepreneurs, especially private entrepreneurs, remains a big challenge. China’s innovation capability has not only caught up but also gradually approached the forefront. The key issue now remains whether it can maintain this momentum.

Consumption or investment?

For a long time, China’s economic growth was driven by investment. Though some scholars proposed making a shift to consumption-driven growth, there has been a divide on this issue in the academic circle. Some believe that we should make the shift, while others insist that investment is still the real driver.

Whether growth is driven by investment or consumption is not as important as keeping a relatively reasonable ratio between the two. Pure consumption without investment makes growth difficult to sustain, which was the problem in the United States in the past. The converse scenario can also cause problems since investment ultimately needs to be converted into production capacity. Once production capacity is formed and products cannot be sold, investment will fail to make gains, which will affect sustained growth.

Therefore, the most crucial thing is to achieve a relatively reasonable ratio between consumption and investment. In the past, imbalance in the ratio could be adjusted by the international market, but now it has become difficult.

The importance of consumption is self-evident. After all, the ultimate goal of developing the economy is to improve the living standards of the people. Only by increasing the consumption of the people can we consume the products produced. But if ordinary people have no money, to advocate consumption is empty talk. Therefore, it is necessary to pursue a reasonable ratio between investment and consumption.

Only when consumption rises can economic growth be sustainable. If consumption remains sluggish with no significant improvement in people’s living standards, how can economic development gain momentum?

My suggestion is to vigorously support consumption growth. We should not just simply advocate and encourage consumption, as part of the macroeconomic policies, the government should spend real money, enhance social security levels, improve people’s welfare, and even directly give money to the people. Only in this way can the macroeconomic momentum truly rebound.

Huang Yiping is dean of the National School of Development at Peking University.