<b>Zhang Bin:</b> The way forward for the Chinese economy

As part of the cycle of economic development, all advanced economies have undergone industrialisation and post-industrialisation. Industrialisation involved the manufacturing sector’s focus on increasing GDP, employment rate and consumption of manufactured products. For China, the post-industrialisation phase implies economic activity will be concentrated in the service industry. 

Based on measures such as income level, the rate of growth of the manufacturing sector, employment rate and the consumption of manufactured products, China has passed the peak of industrialisation. If global experience is a guide, the peak of industrialisation happens when per capita GDP ranges between $8,000 and $10,000 (PPP based on 1990 value). After reaching the peak of $10,000, industrial sector indicators continue to decline. By this yardstick, China has passed the peak of industrialisation. 

China’s per capita GDP reached the $8,030 mark in 2010. This was the point from where a shift from the manufacturing to the service sector had to occur. In 2016, per capita GDP (nominal) was around $12,200. The nominal manufacturing growth rate reached its 30-year peak of 41.8 per cent in 2006, and it has declined in subsequent years. The proportion of employment in manufacturing reached a peak of 30.3 per cent in 2012 and started declining thereafter. The consumption of manufactured products reached its peak in 2011 and has declined since. 

In terms of both global experience and from a theoretical point of view, unless there is serious negative growth in income, these developments constitute a major inflection point for China. The demand for traditional labour-intensive or standard capital-intensive manufactured products has been steadily decreasing. This in turn has dragged the growth rate down, both domestically and globally. This creates a need for China to develop a “new engine” of economic development. 

A “new engine” will need to produce products and services that match income growth and changing demand patterns. Demand for these products or services is growing faster than revenue growth — the demand elasticity is greater than unity, and spending on these products and services becomes a facilitator of economic development. From the supply side perspective, such products and services are also skill-intensive. 

A new engine of economic growth will require upgrading the manufacturing sector. Crossing the peak of industrialisation has also meant a drop in profits for most manufacturing sub-sectors in China. These pressures have also become the driving force for industrial upgrading in different ways. These include adopting technological innovation, developing new products, horizontal and/or vertical integration of production to save per-unit cost, improving labour and production efficiencies. Services within enterprises in the traditional industrial sector in China are now increasingly likely to hive off into independent specialised service providers.

So far, China has achieved significant progress in upgrading its manufacturing sector. In the field of high-end industrial products, the gap between advanced economies and China is noticeable, but the “Made in China” initiative is helping close this gap. In addition to brands which produce products of daily use, some well-known brands are steadily increasing their competitiveness in both domestic and international markets, such as Huawei, Hai’er, Guangdong-based Gree Electric Appliances, Xiaomi, digital and electrical equipment manufacturer Hisense, and automobile major Great Wall Motors. 

China’s evolving economic transition has two distinct features. One involves creating an environment for industry upgradation, and the other attempts to support an open and highly competitive market at home. China’s attempt is to showcase a unique economic model based on its position both as the world’s largest producer and consumer of manufactured products, and of Chinese manufacturing enterprises having a broader market and the advantage of industrial clusters.

The new engine of Chinese growth will also be based on the development of technology-intensive and skilled human capital services. The contribution of such technology-intensive enterprises and skilled human capital to economic growth is not only a proven international experience but also fulfills China’s growth requisites. When one examines the average contribution of the service industry to GDP growth rate in the last five years, a ratio greater than one indicates that the sector contributed significantly to China’s GDP growth rate. 

As in America, not all technology-intensive services grow equally fast; the lower-skill/lower-tech service industries create the lag in overall economic growth. Among the 14 major categories of services, 10 are growing at a faster clip than China’s GDP growth rate. The four sub-sectors with lower growth rates include transportation, warehousing, post and telecommunications services, hospitality and catering, residential and other services, public management and social organisations. However, these sub-sectors are already fairly well-developed in China. 

Crucially, the fast-growing areas include health, social security, social welfare, leasing and business services, finance, scientific research and technical services, geological prospecting, water conservation, environment and the management of public facilities. These are also the sub-sectors that require higher skilled human resources and are increasingly necessary for China.  

The writer is Senior Fellow, China Finance 40 Forum and Chinese Academy of Social Sciences, Beijing. This article is part of a series by Chinese economists facilitated by the Institute of Chinese Studies, Delhi