Chi Fulin: Economic transformation will unleash the growth potential of about 5% in the next 10 years

Editor's note

On January 19, 2024, the "10th (2024 Spring) Macro Situation Forum" hosted by Chinese University, organized by the Chongyang Institute for Financial Studies of Chinese University (Renmin University Chongyang), and co-organized by the Center for Global Governance of Chinese University and the Center for Sino-US People-to-People Exchange Research Center of Chinese University, was successfully held in Beijing. At the meeting, the research reports "The World at the Y-Shaped Intersection - Annual Report on the Macro Situation of the Chongyang Household of the National People's Congress in 2024" and "The Absurd Narrative: The Rise of the "Summit Theory of China's Rise" in the West and Suggestions for Responding to Them were released. Chi Fulin, President of China (Hainan) Institute for Reform and Development, was invited to participate in the theme discussion of "Outlook for Economic and Social Situation in 2024". The following is the content of his speech:

What are the prospects for China's economic growth, how much potential does it have in the next five to 10 years, and has it reached the so-called "peak of growth"?

General view: In analyzing the prospects of China's economic growth, we should look at both the short-term and medium- and long-term, and look at both the aggregate and the structure. In the short term, economic growth is facing greater difficulties and many uncertainties; in the medium and long term, the process of economic transformation has not yet ended, and it is at an important historical juncture. In the next few years, if a substantial breakthrough can be made in economic transformation, it will unleash the economic growth potential of about 5% in the next 10 years.

01

What is the growth potential of economic transformation?

In 2023, the China Reform Institute published an annual research report on the reform of "Structural Transformation", which made a more detailed analysis of this. The general view is that economic transformation and upgrading is at an important historical juncture.

• The upgrading of consumption structure is at an important juncture. Despite the challenges faced by many aspects, the trend of upgrading the consumption structure of residents in the late stage of industrialization has not changed. In 2022, the proportion of service-oriented consumption of urban and rural residents in mainland China was 43.16%, and this proportion will increase to 45.2% in 2023.
• The upgrading of the industrial structure is at an important juncture. In 2023, the mainland's secondary industry will account for 38.3% and the tertiary industry will account for 54.6%. It is estimated that by 2025, the proportion of the mainland's primary industry will gradually decline, the proportion of the secondary industry will be relatively stable, and the proportion of the service industry is expected to reach more than 55%. Among them, the proportion of producer services in the service industry will increase from 41.5% in 2021 to about 50%.
• The upgrading of urban and rural structures is at an important juncture. It is estimated that by 2030, the urbanization rate of the mainland's permanent population is expected to rise from 66.16% in 2023 to about 70%, and the urbanization rate of the registered population is expected to increase from 46.7% in 2021 to about 60%.

2. What is the growth potential of economic transformation? Judging from the actual situation, the economic transformation and upgrading of 1.4 billion people contains a huge market demand space, which is the mainland's unique "transformation dividend."

• The consumption potential contained in the upgrading of consumption structure. It is estimated that by 2030, the proportion of service-oriented consumption in mainland China will rise from 45.2% in 2023 to about 50%. As a result, it will bring 10 trillion yuan of new service consumption.
• The investment potential of industrial structure upgrading. For example, the National Data Bureau predicts that the mainland's data infrastructure will attract about 400 billion yuan of direct investment every year, and the scale of investment in the next five years will be about 2 trillion yuan.
• The potential of domestic demand contained in the upgrading of urban and rural structure. Preliminary estimates show that for every 1 percentage point increase in the urbanization rate, the new investment demand will be about 6.6 trillion yuan; some studies have pointed out that under the current urban-rural structure, the consumption of migrant workers has been suppressed by 23%, and if nearly 300 million migrant workers and their families can truly integrate into the city, the consumption potential of more than 2 trillion yuan can be released.

By 2030, if the potential of the 10 trillion yuan new service-oriented consumer market and the 100,000 yuan level high-tech industry investment market can be fully released, it can drive economic growth by about 4 percentage points. Some estimates show that every 1% increase in the urbanization rate will drive GDP growth of 0.8% annually and 3.5% in five years. Generally speaking, there are conditions and possibilities for the mainland to achieve an average annual economic growth of about 5 percent in the next 10 years.

02

What are the prominent contradictions facing economic transformation?

Generally speaking, the process of economic transformation has been slow in recent years, and there has even been a reversal in some aspects, and the challenge of "retreating if not advancing" is rather severe. As a result, macroeconomic pressure will be intensified and development expectations will be more unstable.

• The upgrading of consumption structure is facing challenges. Although the proportion of service-oriented consumption in mainland China in 2023 has increased compared with the previous year, it has not yet recovered to the level of 2019 (45.86%), and there is still a large gap from our previous expectation of 50% in 2025.
• The upgrading of the industrial structure is facing challenges. In 2023, the proportion of the mainland's service industry will rebound, but the employment structure will reverse, and the number of people employed in the tertiary industry will decrease by 13 million in 2022, accounting for a decrease of 0.9 percentage points.
• The upgrading of the trade structure is facing challenges. On the whole, there is a structural imbalance of "one more and three less" of "one more and three less" in the trade in labor-intensive services, and less in knowledge-intensive, technology-based property rights and patents, and less capital-based services.

In 2022, the proportion of mainland trade in services was 12.42%, which has not yet recovered to the level of 2020 (12.44%), which is even lower than the level of 2019 (14.64%), and has a gap of 9.5 percentage points from the global average in 2022 (21.88%). In 2022, the mainland's three traditional services trade in goods-related services, transportation services, and travel services accounted for 53.8% of the total trade in services, 11 percentage points higher than the world average and more than 17 percentage points higher than that of G7 countries.

2. Are structural contradictions the main reason for restricting economic transformation?From the perspective of short-term factors, the economic transformation process is less than expected due to the impact of the epidemic, and in the medium and long term, structural transformation is constrained by structural contradictions and structural imbalances.

• Constraints caused by irrational factors in the pattern of national income distribution. In 2021, the proportion of the total primary distribution income of the household sector in mainland China was 61% of total income, about 5 percentage points lower than the world average, and the proportion of workers' remuneration was 55.1%, 11.4 percentage points lower than the world average. The proportion of workers' remuneration in GDP has been low for a long time, which restricts the release of consumption by urban and rural residents.
• The structural contradictions faced by investment restrict the release of investment potential. In terms of investors, private fixed asset investment in mainland China accounted for 50.4% in 2023, down 3.8 percentage points from 54.2% in 2022, and 65.8% in 2023 in the service industry, down 2 percentage points from 2020. The decline in private investment in the investment field is directly related to structural contradictions. If these structural contradictions cannot be well resolved, it is possible to stabilize the expectations of private capital and "get twice the result with half the effort".
• The structural contradiction of trade transformation restricts the release of the potential of trade in services. In 2021, 12 of the 22 sectors in mainland China were above the global average. Among them, sound recording, telecommunications, film and courier services (including postal services) ranked highest in the world.

3. Is the key to solving structural contradictions the deepening of structural reforms? From a practical point of view, the adjustment of macroeconomic policies is very important, and deepening structural reform is even more important. For example, studies have shown that an important breakthrough in the reform of factor marketization will increase economic growth by 1.9 percentage points on the existing basis. More importantly, the key to stabilizing enterprises, employment, and growth is to fully implement the decisive role of the market in the allocation of resources and give better play to the role of the government.

03

How to crack it with structural reforms

The salient contradictions of economic transformation?

1. Structural reform to solve the structural contradictions in the implementation of policies. For example, guided by market decisions, policies that are not conducive to economic transformation should be revised, adjusted and abolished, so as to reduce interference in macroeconomic operations, deepen structural reforms to solve the problem of policy incoordination between policies, and improve the level of policy consistency.

2. Structural reform to solve the structural contradiction between policy and system. At present, the key to the worries and uneasiness of private enterprises is the problem of the market environment. It is necessary to break through the "two unswerving" problems that the central authorities have repeatedly emphasized from both theoretical and practical aspects. For example, we should speed up the implementation of a competitive and competitive institutional environment, adopt relevant structural reform measures, and make major breakthroughs in market access, factor acquisition, government procurement, property rights protection and other fields.

3. Structural reform to solve the structural contradictions between institutions. In view of the structural contradictions restricting the efficient allocation of factors, it is necessary to deepen the structural reform focusing on the marketization of factors. For example, we should comprehensively promote the reform of rural homesteads and unleash the potential of rural development. Another example is that with the advent of the era of large models, new requirements are put forward for efficient and high-quality configuration of data. This requires pragmatic measures to form institutional arrangements for the convenient flow of cross-border data, etc.

On the whole, to stabilize expectations and unleash growth potential, we must base ourselves on the short-term as well as the medium- and long-term; promote policy adjustment as well as institutional reform; promote supply-side structural reform as well as consumption-side structural reform; deepen market-oriented reform as well as administrative and social structural reforms. Deepening structural reform with economic transformation as the main line has become a major task for comprehensively deepening reform and opening up, and a fundamental policy for achieving high-quality development.

Chongyang, the National People's Congress

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RDCY

Established on January 19, 2013, Chongyang Institute for Financial Studies of Chinese University of China (Renmin University Chongyang) is the main funding project donated by Chongyang Investment to Chinese University and set up an education fund for operation.

As a new type of think tank with Chinese characteristics, Chongyang has hired dozens of former politicians, bankers, and well-known scholars from around the world as senior researchers, aiming to pay attention to reality, advise the country, and serve the people. At present, the Chongyang National People's Congress has 7 departments and 4 operation and management centers (the Center for Ecological Finance, the Center for Global Governance, the Center for China-US People-to-People Exchange, and the China-Russia Center for People-to-People Exchange). In recent years, the Chongyang National People's Congress has been highly recognized at home and abroad in the fields of financial development, global governance, major-country relations, and macroeconomic policy.

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