China abandons "GDP worship" to focus on environmental protection, technological innovation and social security.

China's economic recovery has gained momentum since the beginning of this year. From January to March, its GDP growth rate reached 11.1 percent, hitting a record high for recent years. More importantly, the roles of investment, consumption and exports in driving economic growth have become more balanced. While breakneck investment growth--a chronic problem for China's economy--started to slow down, residents' consumption made greater contributions to economic growth.

Foreign media commented China is attaching increasing importance to the quality of its GDP. As it embraces a new mode of development, China is poised to develop in a more "scientific" way.

A pressing task

The global financial crisis appeared to have affected China's economic growth, but in essence it took a toll on the country's economic development mode, said a document released after the Central Economic Work Conference at the end of last year. The document said it is high time China changed its economic development mode--the crux of the problems haunting the emerging economy.

Declining demand in overseas markets in the wake of the crisis has presented opportunities for China to change its economic development mode, said President Hu Jintao at a seminar of high-ranking government officials at the beginning of this year. He called on the officials to "seize the opportunities and undertake the historical mission." Dongguan in south China's Guangdong Province provides a textbook example. The burgeoning manufacturing city felt the downturn's impact when the U.S. sub-prime mortgage crisis broke out three years ago. Companies lost long-term business partners and started to worry about the sales of their products.

Dependence on international markets makes an economy prone to external uncertainties and fluctuations. Although they were aware of the importance of changing basically dependence situations, Dongguan entrepreneurs were reluctant to take the initiative. That was simply because they did not want to sacrifice their short-term interests and were afraid of the risks associated with change.

Under mounting external pressure, however, they finally overcame their reluctance. Against a backdrop of drastic changes in international markets, a development mode that puts external demand before domestic demand, investment before consumption and low costs before innovation is becoming increasingly unsustainable. Efforts to change this mode of development are crucial for China to survive the devastation of the financial crisis.

Dongguan, which used to manufacture products based on foreign design and sell them in international markets, has come to give equal weight to domestic and foreign markets. A large number of companies have registered their own trademarks, transforming from manufacturing workshops to independent ventures with research and development capacity. As a result, they have become more competent to mitigate risks in international markets.

While the financial storm has yet to abate, major economies have started a new round of competition. They are devising future plans with a focus on new energy, new materials, biomedicine, energy conservation, environmental protection and low-carbon technologies. "Unless we change our economic development mode, we will hardly be able to gain the upper hand in future international competition," warned Chi Fulin, President of the Hainan-based China Institute for Reform and Development.

A beneficiary of China's 4-trillion-yuan ($588 billion) economic stimulus package, the Dongfang Electric Corporation did not suffer severe fluctuations because of the downturn. But the self-motivated power generation equipment provider still pursued innovation and technological advances in a bid to move up to the high end of the value chain.

Of the 70 billion yuan ($10 billion) worth of orders it has received during the past year, the proportion of coal-fired power generation units declined to 45 percent, while the proportions of nuclear power and wind power generation systems, which represent the future of power generation, have risen respectively to 23 percent and 15 percent.

Inner Mongolia, which has ranked first nationwide in terms of GDP growth rate for eight years in a row, says it will not seek to maintain that position this year. Liang Tiecheng, Director of the Inner Mongolia Development and Reform Commission, said it is possible for the autonomous region to achieve rapid economic growth because it is blessed with rich natural resources and has not been severely devastated by the financial crisis. "We want to slow down a bit so that we can focus more on optimizing our economic structure and improving people's livelihoods," he said.

As they gain a more reasonable view of GDP growth rate, local governments have begun to take the initiative in changing the mode of economic development.

The Central Government set an 8-percent goal for China's GDP growth in 2010 in its government work report this year. It is the sixth consecutive year China has set the goal at 8 percent. Although the goal has remained unchanged over the years, it has different implications, said Yao Jingyuan, Chief Economist of the National Bureau of Statistics. Unlike in 2009 when the government tried to ensure growth against the backdrop of the global crisis, this year it set a goal lower than the actual growth rate of last year. It wants to concentrate on accelerating the change of the economic development mode, instead of pursuing high growth, Yao said. The new concept of seeking development of a higher quality has gained currency in China.

Concrete measures

China has made great efforts to change its development mode since the beginning of this year, and economic restructuring is vital to these efforts.

The No. 1 Document of the Central Committee of the Communist Party of China (CPC) this year focused on agriculture, rural areas and farmers once again. The document unveiled a series of new policies aimed at strengthening agriculture and benefiting farmers, laying solid groundwork for the sound and rapid development of the Chinese economy. In early March, the Central Government allocated 10 billion yuan ($1.47 billion) to subsidize buyers of agricultural machinery in a bid to promote mechanized agriculture. Rural residents' per-capita cash income rose 11.8 percent in the first quarter of this year over the same period last year. The growth rate is 0.6 percentage points higher than the same period last year.

The program to promote the sales of home appliances, cars and motorbikes with government subsidies in rural areas is in full swing. In March, 6.252 million units were sold under this program for 12.4 billion yuan ($1.82 billion), up 320 percent and 450 percent respectively over the same period last year.

The government's policy guidance has played a significant role, said Chang Xiaocun, Director General of the Department of Market System Development of the Ministry of Commerce. For instance, the government raised the price limits for color TV sets and mobile phones that could be bought with subsidies by 100 percent and the price limits for another seven products, including fridges, by 25 percent to 75 percent to give farmers more choices.

By increasing residents' incomes, improving the consumer climate and adopting measures to stimulate consumption, the government has effectively unleashed the people's consumption potential. Now consumption is playing an increasingly important role in driving economic growth.

Innovation is a fundamental approach to changing the economic development mode. Not long ago, Song Honghai, Chairman of Tianjin Weijie Technology Co. Ltd., was overjoyed when his company received $20 million ($2.94 million) in loans with four patents as collateral. The private hi-tech firm was the first to benefit from Tianjin's new initiative aimed at encouraging innovation.

In coping with the financial crisis, Tianjin has made every effort to increase revenue through innovation and improve the climate for innovation. And it has made remarkable achievements. For instance, it developed a supercomputer with a computing speed of more than 100 trillion times per second. It made a breakthrough in lithium-ion power cell technology. It also created a manufacturing base for wind power equipment with a generation capacity up to several megawatts. With these moves, Tianjin has greatly improved the quality of its economic development.

Innovation in the industrial sector will be valuable as China changes its economic development mode. While accelerating major research projects, the government has supported companies' technological upgrading. It has allocated several hundred billion yuan to sponsor innovation and major research projects. It has also dispatched more than 100,000 researchers to study market demand, promote the commercialization of new technologies and help with industrial upgrading at the grassroots level. As innovation becomes a decisive factor in economic restructuring in different regions and sectors, the Chinese economy is bound to rise to new heights.

Changing the economic development mode calls for environmental protection. The global financial crisis has brought China to a crossroads: Should it pursue fast growth at the cost of natural resources and the environment, or seek sustainable development while protecting the environment?

Bearing in mind long-term benefits, the Chinese have chosen a path of "green development."

Take Shaanxi Province in central China, for example. Shaanxi could cash in on its abundant energy resources to achieve a quick economic takeoff. But the province has decided not to rely on them excessively. Yulin City in Shaanxi Province, for instance, has shut down all small semi-coke plants and reorganized or closed more than 200 small coal mines. City authorities have stipulated that newly launched semi-coke plants must have an annual production capacity of more than 600,000 tons and that coal mines must be able to process more than 50 percent of raw coal on site.

Considering environmental protection as crucial to its efforts to change the economic development mode, China has made great headway in energy conservation, emissions reduction and environmental protection while maintaining stable and rapid economic growth. It has intensified efforts to restructure iron and steel, cement, coking and other industries that consume large amounts of energy and discharge large quantities of pollutants. Companies throughout China have embraced the idea of clean production. China aims to cut energy consumption per unit of industrial added value by 7 percent and raise the reuse rate of industrial solid waste by 1.5 percent by the end of this year. Urban residents across the country are also switching to low-carbon lifestyles.

Improving people's livelihoods is a top priority for China's efforts to change the economic development mode. Zhu Qiuping, a retired worker in Beijing, said she was pleased to see her pension rise continually. In early 2010, the government raised the monthly pension for China's 40 million enterprise retirees by 120 yuan ($17.65) for the sixth consecutive year.

Efforts to improve people's living standards not only help achieve goals of letting people share in the fruits of development and promoting social harmony and stability, but also are crucial for China to expand domestic demand, adjust the economic structure and tackle many thorny economic issues. As they give greater prominence to people's livelihoods, local governments have devoted an increasingly larger part of their financial resources to improving people's livelihoods. Beijing Municipality, for instance, has vowed to allocate more funds to projects able to deliver tangible benefits to residents. Although it is under severe pressure to increase its fiscal revenue, Chongqing still spent 600 million yuan ($88.24 million)—double the amount last year--in helping disadvantaged groups in the city at the beginning of this year.

Efforts to accelerate the change of China's economic development mode have benefited the people, evidenced by increasing employment opportunities. In the first quarter of this year, newly employed people in China's urban areas reached 2.89 million. The registered unemployment rate, which stood at 4.2 percent, declined for the first time since the outbreak of the global financial crisis. At the same time, coverage of social security has expanded. Some 15.7 million elderly rural residents are now entitled to pensions under a new government-sponsored old-age pension program. Also, 1.2 billion people across China are now participating in different kinds of medical insurance, making the country's medical insurance coverage almost universal.

Institutional changes

Despite the pressing need to change the mode of development, some regions are still practicing "GDP worship." It is imperative that they change their old mindset and establish new systems to facilitate changes in their economic development mode.

They should balance immediate interests and long-term interests. "We take one step backward so that we can move two steps forward," said Zhang Baoshun, Secretary of the CPC Shanxi Provincial Committee. "We should no longer pursue short-term growth at the cost of sustainable economic development."

Shanxi, one of China's main coal producers, encountered a series of setbacks as it tried to change the mode of economic development. Its efforts often ended up in vain whenever there was a hike in coal prices, Zhang said. Now the province has vowed to change at all costs. As it restructured its coal mining industry, the province dropped to one of the last spots in the GDP growth rate ranking of China's provinces. But it has come close to reaching its goal of building a "new-type energy production base" that is environmentally friendly with low carbon dioxide emissions.

Local governments and companies should balance their own interests and the country's overall interests as well. "I did not feel any resistance, nor did I hear any complaints," said Xu Liuping, Chairman of Chongqing-based Chang'an Automobile. "We all worked together in a bid to make new Chang'an stronger."

Xu made the comments recalling the beginning of the year when Hafei Motor Co. Ltd. and Changhe-Suzuki were merged into Chang'an Automobile. Executive leadership changes, considered the most sensitive part of the merger, were completed in only three days. Xu said he had not expected the merger could be carried out so smoothly.

Since early last year, the Central Government has adopted plans to revitalize 10 major industries, including automobiles and iron and steel, in an effort to promote China's industrial restructuring. The new policies, under which companies were restructured, streamlined or closed, were implemented efficiently, thanks to cooperation from local governments and companies. Some local governments even encouraged local businesses to reorganize with companies owned by the Central Government, although such moves could cost them tax revenue.

Local governments should adopt a holistic view of the costs of change. In the first quarter of this year, seven provinces and municipalities directly under the Central Government, including Jiangsu Province, raised minimum wage standards. They made the decision against the backdrop of a weak economic recovery amid doubts that struggling labor-intensive companies may not be able to afford wage increases. Jiangsu Province, for instance, pointed out that low labor costs are unsustainable. Although the minimum wage increase could affect companies, the province believes the negative effects will be only temporary.

To hasten the change of the mode of development, the government should also carry out institutional reforms. If the government evaluates officials' performance based on the GDP growth rate they achieve, it will be impossible for them to take changing the economic development mode seriously. The government should first of all change the way it evaluates officials. Guangdong Province has taken the lead in this respect.

Heyuan City in Guangdong Province had turned down investment offers that could generate several hundred billion yuan in industrial output in recent years to protect the local environment, said Heyuan Mayor Liu Xiaohua. Because it has resisted the temptation to pursue GDP growth at the cost of the environment, companies engaged in industries that demand high environmental standards such as new electronics, alternative energy, new materials and biomedicine have poured into Heyuan. The city now faces the challenge of protecting its water resources to sustain its environmental advantage.

Wang Yang, Secretary of the CPC Guangdong Provincial Committee, said the sacrifices would be rewarded. Guangdong would adopt new standards to assess the performance of local governments, which will not only include the speed and scale of economic growth, but also look at improvements in the economic structure, in people's living standards, in environmental conditions and in the capability of achieving sustainable development, he said.

The pricing system is also important. Low resource prices allow companies to gain staggering profits, hindering progress in changing the mode of development.

The government will introduce further reforms in a bid to establish a resource pricing system reflecting market supply and demand, resource scarcity and environmental costs, said Kong Jingyuan, Director General of the Department of Economic System Reform of the National Development and Reform Commission. The government has pledged to rectify distorted prices for coal, oil, water and social services in urban areas. Pilot projects have already been carried out on progressive charging for residential water consumption.

China must carry out institutional reforms in a bid to change its economic development mode. But institutional reforms, in areas such as resource pricing, taxation, income distribution and government administration, affect the interests of different sections of society. The government therefore needs to coordinate conflicting interests as it extends such reforms.

Reforms not only have been a major driving force behind China's economic development during the past three decades, but also will help lay the institutional groundwork for China's efforts to change the mode of development, said Zhang Yutai, Director of the Development Research Center of the State Council. A new mode calls for new systems and institutions, which can only be created through reforms, he said.