Chinese Premier Li Keqiang’s speech at this year’s Summer Davos has been discussed frequently. The premier said that “the new season for the Chinese economy will be even more exciting.” Experts have questioned the differences between the old and new phases, and what it is that will be so exciting.

President Xi Jinping has taken the government’s emphasis away from GDP-oriented economic development and Premier Li Keqiang has stressed the need to control inflation. Economic growth in the new season should respect the natural laws of the market and respond to changes in the domestic and international markets. The Chinese economy will only have an “exciting new season” if growth is stable and sustainable.

To foster a new economic dynamic, first of all, the government’s relationship with the market needs to be straightened out. The driving forces in the old season such as government investment, foreign direct investment and cheap labor are losing momentum. Transforming government functions and strengthening the allocation of resources in the market will produce new momentum.

The Shanghai Free Trade Zone promises breakthroughs in this field. A State Council executive meeting on August 16 passed a draft resolution to suspend certain approval requirements for foreign-funded enterprises, joint ventures and Sino-foreign cooperative businesses in the FTZ. The “Negative List” aims not only to create a free environment for foreign investment, but also to transfer the government function from administration to services. If the pilot project is successful, the investment and financing system will reform, which will make resource allocation more efficient and increase productivity. It will foster China’s competitive advantages in the global market and build a new platform for international cooperation and economic growth.

Momentum will also come from opening up more to the outside world. China’s processing and export industries have grown rapidly, benefiting from flourishing foreign markets. In the new stage of the Chinese economy, the comparative advantages of the labor force have changed and processing export enterprises have gradually moved out of the country. Therefore, incentives such as preferential taxes, land policies and export rebates will no longer support the status quo. New measures are necessary for China to open up more.

Developing domestic markets is another important part of the new “economic season.” China has enjoyed more than 30 years of high speed economic development as a result of two policies. One is the policy of fixing farm output quotas for each household, implemented in the late 1970s. This policy increased productivity in the countryside, and helped surplus labor flow from the countryside to the cities, which promoted urban development. The second policy, issued in the 1990s, allowed for joint ownership in the economy, which encouraged the growth of private enterprises and the processing export trade. As a result of these policies, China became a global manufacturing center.

The new stage of the Chinese economy has emphasized liberalizing the domestic market. If the “Negative List” management can also be applied to the private sector, giving private enterprises the same treatment as foreign peers, then it will drive many different industries. The financial sector should also be open to private investment. Private capital and private banks should be encouraged, to boost the growth of the real economy.

In addition, a new urbanization strategy will drive the economy. This is not another round of the “urban construction movement.” It will help farmers avoid the “low-income trap” and double their per capita income by 2020.

The “new economic season” will rely on innovation and reform. But some local governments are still persisting with the old model of huge investment, high debt financing and land revenue. Worse still, the draft plans for free trade zones proposed by local government do not show their respective comparative advantages or respect for the law of the economy. Every local government is vying for the state investment and preferential policies. Even when approved, these projects are nothing but a waste of resources.

Companies that are trapped in the old model are still waiting for policies, capital and bonuses. Foreign leaders who have spoiled by China’s last round of stimulus policies have argued that China’s economy risks a hard landing, in the hope that the government will introduce another round of stimulus policies.

China faces great challenges in the “new season of economic growth.” Fundamental changes will be necessary and the confidence of the leadership is paramount.

The author is a chief economist at Galaxy Securities Co., Ltd.

This article was translated by Li Shen. Its original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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