China's Economic Transition: Achieving Success
Author: GAO Zhanjun YANG Weimin
China's economy is on a trajectory toward full recovery and stronger growth. The meeting of the Political Bureau of the Central Committee of the Communist Party of China on April 28 pointed out that the current improvement in China's economic operation is primarily restorative，with the endogenous driving force not yet robust. At the meeting on July 24，it was reiterated that China's economy faces new challenges. As we are currently in an era of uncertainties，and new challenges are constantly emerging，the question of how to foster growth and empower the real economy becomes a pressing concern.
Amid these challenges，the 19th National Congress of the Communist Party of China has proposed that China’s economy has shifted from a high-speed growth stage to a high-quality development stage，and is in a critical period of transforming the development mode，optimizing the economic structure，and
transforming the growth momentum. As China undergoes this economic transition，questions arise about the criteria to evaluate progress，the principles guiding decision-making，and the strategies for policy formulation.
In an exclusive interview with China Forex，Mr. YANG Weimin，Vice Chairman of the China Center for International Economic Exchanges and Member of the Standing Committee of the 13th National Committee of the Chinese People’s Political Consultative Conference (CPPCC)，and Deputy Director of the Economic Committee of the National Committee of the Chinese People’s Political Consultative Conference，shared insights on these issues with Dr. GAO Zhanjun，the Executive Editor-in-Chief of China Forex.
Discussion 1
China’s macroeconomic operation situation and recovery path
GAO Zhanjun: China’s economic recovery in 2023 endures but the road has been bumpy. The economy performed relatively well in the first quarter，and dipped in the second quarter，especially in July，before bouncing back since August. In the face of this intricate scenario，it is essential to evaluate China's economic performance. What are your thoughts on the macroeconomic recovery trajectory and how it may progress in the future?
YANG Weimin: The fundamentals of China’s long-term economic growth remain unchanged. China’s economy grew by 5.2% in the first three quarters of 2023 and is expected to continue recovering in the fourth quarter，with annual growth exceeding 5%. Early-stage policies are being implemented，with some already showing effects.
The economic recovery is gradually gaining momentum，but it faces challenges. Unlike previous sharp and linear recoveries as after the 2008 financial crisis and the 1998 Asian financial crisis，this time the recovery exhibits a "wave-like development and zigzag progress"，as noted in the Political Bureau of the Central Committee meeting on July 24. This trend has been evident in the first 10 months of this year: strong signs of recovery in the first quarter，followed by a decline in the second quarter，and a pick-up in August.
In summary，this economic recovery is not a typical V-shaped rebound but rather a rocky and tortuous process. Ongoing effects of the pandemic and the unique nature of our economy suggest a recovery that may not be as swift as in the past. In the long run，China’s economy will still improve on the whole and the growth will be sustainable supply capacity. China's economic development will reduce reliance on real estate and finance，maintaining the basic stability of manufacturing proportions. China will focus on promoting innovation and development，strengthening the foundation of basic parts and components，basic software，basic materials，basic processes and industrial technology，and pushing forward the strengthening of the manufacturing chain，so as to build China’s manufacturing capacity and capabilities. The growth curve is likely to remain stable，with fluctuations over time—a wave-like pattern with variations from year to year and quarter to quarter.
Discussion 2
Strengthening the dynamics of micro-entities are the key to the long-term improvement of China’s economy
GAO Zhanjun: You have pointed out many times that the internal driving force of China’s economy remained modest and demands were still insufficient. Therefore，strengthening the internal driving force of enterprises and consumers are not only the key getting our economy back on its feet，but also the key to the long-term growth of China’s economy. Since the second quarter of 2023，the issue of insufficient domestic demand has become increasingly evident，accompanied by a decrease in market confidence. Is the underlying cause of the issue a reflection of the overall lack of internal driving force of individuals and firms?
YANG Weimin: The meeting of the Political Bureau of the CPC Central Committee in the first quarter of 2023 pointed out that the internal driving force remained modest，and this statement is still applicable to the current stage revealing that the fundamental reason for certain problems and difficulties in the current economic operation is due to the lack of driving forces. Who is not being motivated? I believe the micro-entities are not yet being motivated. In other words，as producers，the momentum of investment and production the enterprises are modest. They also confront falling prices and profits，and consumers are not very motivated to spend either.
Three main factors contribute to the weak motivation of enterprises. Firstly，the international environment has experienced unprecedented changes，particularly in the evolving China-US relationship. And the international environment has further deteriorated compared with the trade conflicts period in 2018. Moreover，the lasting impact of the COVID-19 pandemic is widely acknowledged. Thirdly，there is a mismatch in the timing，intensity，and effectiveness of economic governance. As early as 2021，the Central Economic Work Conference pointed out that it is necessary to grasp the timeliness and effectiveness of policy adjustments and reforms. That is why I have said whether the timing of the policy is reasonable，how far the policy will go，and whether the repercussions of certain industry policies on other sectors and the overall economy have been adequately considered.
The reasons behind the lack of spending power among consumers warrant further exploration. Firstly，household consumption has always been a shortcoming on the demand side in the process of China’s economic development，with a prolonged absence of effective policies to address insufficient household consumption. While China's final consumption expenditure has played an increasing role in driving economic growth，data analysis reveals that the rise in government spending has masked a decline in household consumption within total consumption expenditure. In other words，although the total consumption expenditure has increased，it is mainly driven increased government spending，and household consumption is actually declining. From 2001 to 2020，the share of government spending in final consumption increased by 4.5%，while the share of household consumption decreased by 4.5%.
Secondly，the enduring shock of the pandemic has impacted the employment and income of numerous groups，significantly impairing the spending power of residents，especially those in low- and middle-income brackets.
Thirdly，household consumption has tended to focus more on real estate over the past decade. In 2020，real estate consumption accounted for about 14% of household consumption，ranking first in household consumption，and this proportion has continued to increase over the past decade. Residents are more likely to allocate spending towards housing and mortgage payments，affecting the growth of consumption in other areas.
Fourthly，there has been a historical emphasis on production over consumption. For example，we are not considered a large country of living or consumption，which means that our residents' consumption has lagged behind the expansion of production capacity. Current policies have prioritized increasing production capacity through foreign trade rather than enhancing domestic consumption and demand. In this case，if exports are impaired，the economic cycle will be hindered. The current challenge in China's industrial production stems from about 40% of overall demand being reliant on foreign demand. This dependence exposes China to vulnerability when the international market is volatile，as seen recently，due to shrinking demand. Export-driven growth declined，leading to a slowdown in the industry. Addressing this requires long-term reforms to the demand structure，reducing reliance on foreign markets. If future industrial growth continues to hinge on 40% exports，China may remain exposed to fluctuations in the international market.
Discussion 3
The crux of private economic development and its response
GAO Zhanjun: To enhance the internal driving force of enterprises，we must first enhance the endogenous power of the private economy. This year the central government issued the 31 Articles to promote the development and growth of the private economy，and the National Development and Reform Commission has recently set up a private economic development bureau. How do you assess the role of these measures in stabilizing private sector expectations and promoting its development? On the basis of adhering to the “two unswerving”，how should we promote the development and growth of the private economy from the theoretical，institutional and policy levels?
YANG Weimin: The 31 Articles issued in July this year addressed some of the major concerns about the private economy，which is very detailed and targeted. The timing and necessity of promulgating these articles are both opportune and indispensable.
The implementation of the 31 Articles holds a pivotal role in stabilizing China's economic growth. The private economy，contributing to over 50% of major economic indicators such as tax revenue，gross domestic product，and technological innovation achievements，serves as a crucial driver for China's economy. Moreover，it accounts for more than 80% of urban employment and over 90% of total enterprises. Therefore，meeting the expectations of the private economy is essential for the entire economy. Ensuring the effective implementation of the 31 Articles across all departments and regions is paramount.
A private economy development bureau was set up under the National Development and Reform Commission. It is also a concrete measure to implement the 31 Articles of the central government. For the problems encountered by the private economy are industry-specific，some are industry-specific，but more are generic. And there are many new issues that the existing industries and regulatory departments have not encountered and have no precedent. So the establishment of such a private economic development bureau is undoubtedly helpful for private enterprises in addressing general policy issues and difficulties. It can effectively summarize the problems encountered by the private economy，facilitating the adoption of comprehensive and long-term measures to stabilize expectations and address real-world challenges for private enterprises.
In the long run，in addition to the 31 Articles，we need to strengthen our economy on two fronts. The first is to strengthen theory construction. The 31 Articles mentions the need to strengthen theoretical research，but with not much elaboration. In my opinion，the main purpose of theoretical research is to strengthen the study of the nature，status，and role of the private economy in the socialist market economy and other basic economic systems，and to further explain these three points theoretically.
The second imperative is to fortify the legal system. The socialist market economy governed by the rule of law，suggesting that policy adjustments，including regulations，must align with legal frameworks，contributes to the long-term stability of expectations within the private economy.
In summary，a robust theoretical framework and adherence to the rule of law are essential for the sustainable development of the private economy. The theoretical clarification of the nature，status，and role of the private economy is essential，as well as the concepts of multiple ownership，factor distribution，and common prosperity. Enhancing relevant laws and regulations is crucial，as is clarifying the scope of access to the private economy. When it comes to the relationship between government and business，further system improvement and psychological pressure on government workers and public officials to serve the private economy are paramount.
In addition，to enhance the internal driving force of enterprises，it is also necessary to enhance the internal driving force of platform enterprises，so that they can take the lead in promoting scientific and technological innovation，enhancing international competitiveness，driving economic development，and expanding employment. We should enhance the internal driving force of the real estate industry，and accelerate the reform of the housing system and on land，taxation，finance，provident fund，leasing，and equal rights to renters and buyers.
Discussion 4
Measures to be taken to expand consumption
GAO Zhanjun: It is important to increase the internal driving force of consumers，as this lack of demand is largely due to a lack of spending by residents. Therefore，the key to fostering robust economic growth in China lies in increasing consumption. How can we increase consumer spending and drive economic growth?
YANG Weimin: Supply creates its own demand，and demand leads to supply. Insufficient demand is the main contradiction at this stage. The lack of domestic demand is mainly due to a lack of household consumption. Household consumption is the main factor affecting demand growth，both in long term and in the short term. Expanding government spending is conducive to improving public services，but the core of improving people’s livelihood is private consumption by residents.
From 2010 to 2020，the proportion of China’s investment and exports in total demand decreased，while final consumption has increased. Over the past three years，the pattern of economic growth has reverted to being more driven by investment and exports.
There are various reasons for the weakness of household consumption，including the low and further decline in household income proportion in GDP，the crowding-out effect on consumption due to the increase in real estate-related expenditures，and the low income level and consumption capital of rural residents.
As a strategy to prioritize the recovery and expansion of consumption，a number of adjustments and optimizations are needed in terms of development goals，development strategies，and development policies. These include raising residents' incomes to increase their spending power，adopting an approach that minimally interferes with or restricts residents' consumption，and reforming the household registration and housing system.
In order to expand household consumption，policies should be specifically tailored to different consumer groups. One such group is low-income households，particularly those that have been significantly affected by the pandemic and whose finances are strained. The focus in this case should be on enhancing their purchasing power through increased transfer payments and subsidies，helping them return quickly to their previous levels of income and facilitating consumption.
For middle-income group，the government's focus is on easing some consumption restrictions，as they are the primary buyers of homes and cars. While there has been some easing in home buying policies，there has been less corresponding easing in car buying policies.
For high-income group，the government aims to expand the supply of mid-to-high-end consumer goods and services to accommodate their spending habits and stimulate their consumer demand，which indirectly leads to more jobs.
The unregistered population with migrant workers as the main body is a potential middle income group and represents the largest group that can contribute to consumption expansion. China is expected to have fully modernized by 2035，and it is essential to address the citizenship of 100 million to 200 million migrant workers，whose housing consumption can generate significant demand and related consumption，necessitating reform of the housing system and household registration to promote migrant worker citizenship.
The first reform is to