Ten Changes in China’s Economy in the Coming Decade
Presentation in New Zealand Embassy in China, 2017-08-25
Xu Hongcai, Deputy Chief Economist of CCIEE
In the coming decade, as China continues its economic development and consolidates its leading role in the world economy, ten changes that greatly influence both China and the world’s economy might take place.
The first change: by around 2027, the scale of China’s economy by GDP will be larger than that of the United States, ranking the first post in the world. During this period, China's economy will adjust and slow down its pace due to the "new normal" given that its potential economic growth rate is going down. Before 2020, the growth rate of the Chinese economy will be no less than 6.5%; by 2025 it could come down to about 5%; by 2030 it could reach only 4%, and stay in the range of 3%~4% steadily for a long time. The Sino-US strategical relation will have to face an increase in frictions in the future, therefore both sides need to consciously control conflict risk to avoid into "Thucydides trap".
The second change: by around 2023, China's per capita income can reach a level of $12,000, entering into the ranks of high-income countries by the definition of the World Bank. China will successfully go through the “middle-income trap”. According to official data, China’s per capita income has grown by $8000 in 2016. We are now more concerned with questions such as: how to achieve sustainable and inclusive growth in China, and how to effectively reduce social strata polarization of income and wealth in the future with due consideration given to fairness. Also, exploring approaches that enable more people share the bonuses of its economic development and reform. All these questions bring forth many challenges for China’s decision makers to address.
The third change: by 2020, China will step into a stage as an innovation-oriented country. In 2016, the Chinese government issued the “Thirteen-Five National Program for Scientific and Technological Innovation”. The Program indicates that by 2020, comprehensive innovative capability of countries should rank in top 15 in the world. As an innovation-oriented country, the contribution rate of progress in science and technology should increase from 55.3% in 2015 to 60% by then. Value added in knowledge intensive business services will take up 20% in China’s whole GDP. Patent applications will be doubled compared to its original level in 2015. Investment in R&D will count for 2.5% of the overall investment of the economy. The Program also proposes the construction of an efficient collaborative national innovation system, fostering vibrant innovation, boosting innovation growth led by high-end technology, building an open and collaborative innovation networks, establishing a modern innovative governance, and introducing institutional arrangements for environmental protection.
The fourth change: by 2025, China will embrace a much enhanced manufacturing industry. In the last two years, the Chinese Government has taken various steps to push forward the “Made in China Strategy 2025”. Currently, the capacity of China’s manufacturing has already been the largest in the world. China also has got itself relatively complete upstream and downstream production chains in various industries. In some areas, such as aerospace, rail, nuclear, high voltage electricity, China has reached the leading level of the world. However, there are still issues with its lack of innovative capacity, extensive production mode, and high-efficiency resource utilization. In the coming few years, China is going to encourage the development of SMEs, promote the cooperation in industry of different levels, especially it will focus on intelligent manufacturing, pay special attention to creative talents and the nurturing of the so-called "spirit of the artisan", and optimize industrial structure in the hope to upgrade its manufacturing capability.
Fifth, China will take a leading role in the global digital economy. In 2016, the number of Chinese Internet users had reached 731 million, of which 95% Internet users have their Internet access through mobile phones. With Tencent and Alibaba as top players in the scenario, more China's Internet enterprises have entered the ranks of top ten of the whole world. In recent years, Tencent has been actively implementing a diversification strategy, which includes instant communication, gaming, and financial services. Following Alibaba’s Alipay, Tencent has also introduced its own online payment service. As China’s outbound trips reached 120 million a year, domestic online payment services have already reached out their influence in the international market, which used to be dominated by PayPal. As a strategy on a national level, China’s carrying out its “Internet+” strategy aims to restructure the traditional industries and dig out more potential in the growth of these sectors. In the field of the Internet, China's hope for overtaking became first in the world.
The sixth, China economy will reach a relative external balance. For a long time, China's economy has been externally imbalanced. China's trade surplus will show a narrowing trend in the future. With the opening in the service sector, China's service trade deficit will be expanded, and the overall trade surplus will be narrowed. China's economic rebalancing, including Sino-US trade imbalance, calls for the necessity to expand China's service trade deficit, to hedge the surplus of goods trade. The Fed in the US has now entered a rate hike cycle. The US dollar has also entered into revaluation cycle. There is a slight depreciating pressure on RMB exchange rate. As China's comprehensive economic power rises, RMB’s international demand will continue to increase, which will also promote appreciation of the RMB. Basing on two aspects of the impact, RMB against the "basket" currency will remain relatively stable, which in fact will help the external balance of the economy.
The seventh change will be the speeding up of RMB’s internationalization. In the future, RMB will play a more active role in the international monetary system, which is broadly in line with China's economic status. Now, in China's foreign trade, the RMB stands at about 30%; scale of foreign investment that directly uses the RMB is also expanding. In 2016, RMB joined the IMF SDR basket of currencies, marking it the world's third-largest reserve currency. As the RMB expanding its use along the Belt and Road in the construction, its internationalization will be accelerated. In this process, Shanghai and Hong Kong as international financial center will play a more important role, and a global network of the offshore RMB markets will be built in the world. By 2025, the RMB will take 10% of international currency reserves.
The eighth change, China will gradually come into an aging society. China with an aging population will have to face a series of economic and social problems. In the end of November 2000, the fifth population census data showed that Chinese people over the age of 65 reached 88.11 million people in China, accounting for 6.96% of the total population; a population of 130 million people over the age of 60, accounting for a total population of 10.2%. By international standards, the above percentages indicate that China have already entered an aged society. Over the next decade, China will accelerate in ageing with low fertility. Problems coming with an aging population, such as shortages in social security system, pension services have become increasingly prominent. The declining saving rate and labor shortages will have a negative impact on China’s potential economic growth.
Ninthly, urbanization will continue to make steady progress. By 2030, China's urbanization rate will reach 70%. In this process, some profound economic change will take place. For example, China’s land system, household registration system, social security and health care system will be changed. The advanced production factors of the city will be better connected with resources (such as land) in rural areas to promote the merger of land and agricultural modernization. The new urbanization based on industrialization will lead to great changes in China's dual economic structure.
Tenthly, China's economy will further open. Currently, there presents the protectionism and deglobalization trend in the world. As a global public goods, the Belt and Road Initiative is becoming a new engine to promote the sustainable development of world economy, and provides an updating framework to promote the new globalization from open and inclusive perspective. It's not like the old version of globalization, which has brought a lot of byproducts, such as wealth polarization and rampant terrorism, color revolution, social upheaval, and so on.
All in all, in the coming decade, while expanding its own economy and make it more open to all the rest of the world, China will take steady steps to further its economic structure reform in supply side and enhance its innovation capability to achieve a more sustainable economic development, which will be also a great contribution to the international community.