Growing Ambitions

To grasp the rationale behind the ambitious plans, NewsChina interviewed Liu Shijin, a leading advisor to China’s central leadership in the formulation of the 14th Five-Year Plan (FYP). Serving as vice president of the Economic Commission of the National People’s Political Consultative Conference and vice-chairman of China Development Research Foundation, Liu was entrusted in early 2020 to lead a study of China’s priorities in its reforms for the next five years and beyond. He is the author of “Understanding the 14th Five-Year Plan – China’s Reform Agendas Under a New Development Landscape,” an authoritative interpretation of the 14th FYP. 　

NewsChina: You said that China’s next round of reforms is about whether China can make breakthroughs given the existing challenges. What are these challenges? 　

Liu Shijin: Since launching the reform and opening-up policy in 1978, China maintained an average annual growth rate of over 10 percent for more than 30 years. In the past 10 years, China’s growth rate has gradually slowed, but still it could maintain an annual growth rate of 5-6 percent in the next decade, considerably higher than most advanced economies. 　

But after decades of rapid growth, China faces two major challenges. The first is the middle-income trap. Compared to advanced economies, China has late-development advantages, with greater structural potential in the fields of technological advances, industry structure, consumption and urbanization. In the past, China’s rapid growth was largely driven by export growth and investment in infrastructure and the real estate sector. 　

But as China becomes a middle-income country, the structural advantages it benefited from in the past decades have gradually diminished, and China needs to search for new sources of growth. The question now is whether China can transform into a high-income economy. 　

In the post-WWII era, only 13 economies have moved from middle- to high-income. Most economies encountered economic stagnation, if not recession, after becoming middle-income. The fact that China needs to address its income disparity problem makes it more difficult to achieve this goal. 　

The second challenge China is facing is the external environment. As the world’s most populous country and the second-largest economy, the continuing expansion of China’s economy will inevitably lead to a shift in the global political landscape. While the middle-income trap is something many economies have encountered, a more hostile international environment is an unusual challenge. To put it simply, the focal issue for China in the next five years is whether it can steadily move toward a high-income economy amid what the central leadership calls “profound changes unseen in a century.” 　

NC: Where can China find new sources of growth to overcome the middle-income trap? 　

LS: To find new sources of growth, we proposed a development framework we call the “1-3-2” framework. First, “1” refers to a primary new source of growth, which is the development of China’s urban agglomerations [like the Greater Bay Area or Beijing-Tianjin-Hebei]. I believe some 70 to 80 percent of China’s growth potential will derive from them. 　

The “3” refers to three areas in the real economy where China can make improvements and find new sources of growth. The first area is the existence of administrative monopolies in many fundamental industries, such as energy, logistics, communication and finance. By promoting market-based competition in these industries, China can increase the efficiency of its overall economy. The second area is the expansion of China’s middle class. So far, about 400 million people can be categorized as middle-income earners in China. If the size of China’s middle class doubles to 800 million, it will substantially boost domestic consumption. The third area is China’s fundamental research. Despite technological advances, China still lags far behind in fundamental research, which seriously undermines the country’s efforts to upgrade the economy. 　

Finally, “2” refers to the development of the digital and green economies. As a late-developing economy, China will have advantages in these two fields. But they should not be considered as two separate industries. Instead, the concept of digital and green development should be integrated with all sectors to boost productivity and efficiency across the entire economy. 　

NC: Why and how can the development of urban agglomerations become a primary source of growth for China in the following years? 　

LS: The development of integrated city clusters can lead to the redistribution of industries and urban populations. For example, lowend manufacturing and service enterprises may relocate to smaller towns and cities in the periphery of these agglomerations, while highend and high-tech firms will become more concentrated, which will increase the efficiency of the economy. 　

In the meantime, the development of city clusters could lead to new flows of inter-city migration. Some of the senior population will move from large city centers to smaller towns and cities to create new retirement communities. With urban clusters attracting more rural migration, leading to new rounds of urbanization, there will be new demand for infrastructure and real estate construction. 　

With a focus on technology-driven and green development, China does not have to follow the path of developed countries and can find its own path of urban integration. 　

NC: What reform policies should China adopt to unleash the growth potentials you mentioned? 

LS: First, China should deepen rural land reform to promote the transfer of rural land that is collectively owned by rural communities. A vibrant rural land market can increase the value of rural land and rural residents’ property income. In doing so, the government should ensure the benefits deriving from land transfer will be used for the social security of rural residents. In the long term, China should establish a modern social security system for rural residents, so they no longer have to rely on their land for social security. 　

Second, China should reform urban planning doctrines. Rather than a top-down approach, the government should adopt a more market-oriented approach and formulate urban-planning policies based on population movements and demographic shifts. 　

Third, China should lower the barriers for fundamental industries and introduce more competition. Regarding income disparity, China should aim to create a more equitable social security system by incorporating benefits for urban and rural residents. China should promote more public housing projects for migrant workers. To encourage fundamental research and innovation, China can experiment to establish special education and research zones in select cities, like it established special economic zones in the past. 　

Finally, China should adopt a bolder approach to trade policies in terms of reducing tariffs, subsidies and non-tariff barriers. After signing the Regional Comprehensive Economic Partnership (RCEP) with [Asia-Pacific] countries, China should seek to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). A more open trade and investment policy will promote the creation of a higher-standard domestic market, which will help unleash growth potentials. 　

NC: After not setting a specific growth rate in 2020, China announced a GDP growth target of 6 percent for 2021. Does that mean that GDP growth will continue to be the focus of China’s economic policy? 　

LS: Despite the impact of the Covid-19 pandemic, China achieved impressive GDP growth [in 2020]. In the next five years, China should adopt a new development concept and a new set of economic indexes that focuses on the quality rather than quantity of economic development. 　

The new set of indexes should start with employment figures and end with GDP growth rate. As a measurement of livelihood and the effectiveness of the distribution and usage of social resources, employment figures should be at the center of China’s economic policy. In the meantime, other indicators such as per capita disposable income, price indexes (CPI and PPI), macro leverage ratio, total factor productivity and carbon intensity should also be taken seriously. 　

But it does not mean that China should abandon the GDP growth rate altogether. After all, it is the standard measure of the value of a country’s economic activities. But in the future, China should take its GDP target as an objective prediction, rather than an arbitrary figure to evaluate its economic policies. To achieve its 2035 long-term goals, China should focus on the quality of its economic development, rather than on some unrealistic growth target.