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New thoughts on China’s growth engine

By Zhang Monan: 0 Comment(s)Print E-mail chinausfocus.com, November 20, 2013

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A cargo vessel loads at the container berth of Tianjin Port. China's next round of reform will focus on an all-round marketization so as to establish an open, unified and orderly market system. [Photo: Liu Haifeng]

The communiqué of the Third Plenum of the 18th Central Committee of the Communist Party of China has unveiled a panorama roadmap about China’s new round of reform for the next decade.

The guideline document for a “comprehensively deep-going” reform is abundant with detail. The document makes clear that market will play a decisive role in the allocation of resources and that the government’s role will be improved; it announces that a top-level leading group will be set up to take charge of designing, coordinating and promoting nation-wide reform; and the communiqué says that the country’s governance system will be “modernized” into a complete, standardized and effective one. “Decisive results”, the communiqué says, “should be achieved in the reform of major areas and key links by 2020.” This last point is probably the most significant for China’s future development.

China has entered a new stage of development, and a second round of economic growth. China’s economy is currently sustaining external impacts, which have been strengthened by the economy’s intrinsic structural problems. Under these conditions, we can no longer follow the old way of macro-control. Instead, we should create a new model of macro management to develop an impetus for economic growth.

Economic growth is generally driven by an increase in supply on the micro level, and that of demand on the macro level. Since the onslaught of the international financial crisis in 2008, the global economy has remained sluggish. Countries across the world have generally adopted the method of expanding domestic demand to stimulate economic growth. This is the theory of “demand management” in economics.

Most governments have followed this theory in the past few decades. After the Western countries completed their industrialization in the 1920s and 1930s, the supply became so abundant that it greatly exceeded the demand. The contradiction worsened and led to the Great Depression.

That crisis gave birth to the Keynesian Theory that advocated demand management and government intervention, which US President Franklin Roosevelt promoted in the West and across the world. The transient policy for short-term demand management later became favored by many countries and even grew into a long-term policy. Major nations began to exercise government intervention as a new way of stimulating economic growth. The growth no longer depended only on production promotion and efficiency improvement. Increasing exports, consumption and investment became the main force propelling economic growth.

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