After over three decades of double-digit annual GDP growth, China’s economy has entered a period known as the ‘New Normal,’ characterized by more moderate GDP growth and efforts to transition to a development model based on innovation and domestic consumption rather than state-led investment and export manufacturing. The country’s previous development model has produced diminishing returns, prompting a series of reforms that includes liberalizing interest rates and financial markets, adjusting revenue sharing between the central and local governments, and restructuring state-owned enterprises. The success of these measures will help determine how favorable China’s economic prospects will be going forward.
In a panel moderated by Andrew Browne, Chinese and international experts discussed China’s economic reform agenda and the country’s slower rate of economic growth under the ‘New Normal.’ They predicted how the downturn of the Chinese stock market and policy changes like internationalizing the renminbi and opening financial markets will affect China’s economic future and the country’s relationship with the global economy.
- Shifting Economic Landscape: China is restructuring its economy away from investment-heavy industrial manufacturing toward high-tech innovation and domestic consumption. One panelist observed that the effects of this shift will be felt differently in high-tech hubs like Shenzhen and in industrial centers like Liaoning. Panelists added the transition is not likely to be an easy one. Producer and consumer price indexes have been falling for the past few years and the 30 percent drop in China’s stock market has made investors cautious. However, they added, the market was still valued about 150 percent higher than it had been a year before the downturn began.
- Pathway to Diversified Investment: Panelists agreed that China’s efforts to diversify and increase outward overseas investment will deeply impact the world. One participant noted that China’s exceptionally high savings rate and its state-led banking sector have made the country’s investors more willing to fund long-term projects, such as infrastructure, than those from other countries. Panelists pointed out that China’s outbound investment is currently about $100 billion annually, and there is ample room for future growth. They also predicted that China’s outbound and inbound investment is likely to reach parity in the coming years with outbound capital eventually overtaking inbound. Finalizing a bilateral investment treaty with the United States will be an important milestone, panelists explained, because it will then be easier for China to negotiate similar treaties with other countries down the road.
- Internationalizing the Renminbi: Participants pointed out that the renminbi has appreciated in value by about 30 percent since 2005, suggesting that its 3 percent devaluation in August was comparatively modest, albeit unexpected. They noted that the renminbi already ranks fourth among global currencies as a means of valuing trade transactions, a role that China hopes to continue to expand. Beijing also wants the International Monetary Fund to include the renminbi in its Special Drawing Rights, a supplementary international reserve asset that only includes fully convertible currencies, panelists said. One participant acknowledged that both ways of strengthening the renminbi’s international role are desirable, but cautioned that further reforms to China’s financial markets are needed before these goals can be reached.
- Global Reactions: In the past decade, China has surpassed France, the UK, and Japan to become the world’s second largest economy, panelists said. Unsurprisingly, countries around the world have closely followed developments in China’s economy. Major manufacturing exporters such as Germany are adjusting to China’s slowing economic pace after decades of double-digit export growth. Commodity exporters, such as Australia and Brazil, are concerned that flagging Chinese demand for oil, iron ore, and other resources will negatively impact their own economic climates. Meanwhile, the U.S. Federal Reserve has held off raising interest rates, at least in part due to less rapid growth in China.
- A New Economic Paradigm: As China’s economy redirects toward innovation and consumption, panelists predicted that the government would accelerate the pace of reforms at the Communist Party Central Committee’s fifth plenary meeting later this month. They observed that regulatory, pricing, financial, and state-owned enterprise reforms are already underway, opening up new opportunities and challenges for firms operating in China. One participant pointed out that there is not a mechanistic relationship between reforms and slower economic development, suggesting that innovation may be an engine for future growth. Panelists acknowledged that China remains a developing country and will encounter challenges along the way, but they were confident that the government remains committed to its reform agenda.
Andrew Browne is a senior correspondent and columnist for the Wall Street Journal. He previously served as Asia-Pacific news editor for Reuters. He has over twenty years of experience running news bureaus throughout Asia.
Ding Yifan is a senior fellow and the deputy director of the Institute of World Development under the State Council’s Development Research Center. He has served as a visiting scholar at Johns Hopkins University’s School of Advanced International Studies.
Jiang is the director of the Center for Economic Security Studies at the China Institutes of Contemporary International Relations. He is also a research fellow at the Center for National Strategic Studies. His research focuses on economic security and theories of global economics.
Alexa Lam is a professor of law at the University of Hong Kong. She previously served as the deputy chief executive officer of the Hong Kong Securities and Futures Commission. She is one of the principal architects of opening capital markets and renminbi investment products.
Vikram Nehru is a senior associate in the Carnegie Asia Program. An expert on development economics, growth, poverty reduction, debt sustainability, governance, and the performance and prospects of East Asia, his research focuses on the economic, political, and strategic issues confronting Asia, particularly Southeast Asia.
Yao Yang is the dean of the National School of Development at Peking University. He is also a professor and the director of the China Center for Economic Research. His research focuses on China’s economic growth, institutional change, and rural development.