Deeper reform can help meet new challenges

Thanks to China’s transformation from highspeed economic growth to high quality development, its economy has reached a period of significant strategic opportunity. By 2035, China is expected to achieve socialist modernization with its per capita GDP reaching 35,000 international dollars in terms of purchasing power parity (PPP). While the United States reached that level in 1988, Germany, France, the United Kingdom and Japan did so in 1998, 2001, 2003 and 2004, respectively.

But to realize that goal, China has to solve several significant long-term problems. First, it has to maintain high total factor productivity (TFP), which at present is only 43 percent that of the US, whereas when the main developed countries achieved economic modernization, their TFP was about 78 percent that of the US. To increase its TFP in the following years, therefore, China should expedite systemic reform in order to let the market play a leading role in factor distribution and give full play to factor efficiency.

Second, to achieve socialist modernization by 2035, the proportion of the primary, secondary and tertiary industries in GDP should be roughly 3 percent, 32 percent and 65 percent, just like it was for the developed countries when their per capita GDP reached 35,000 international dollars in PPP terms. Which means China should focus on developing the service industry, especially the high-end service industry.

China should also maintain a high ratio of manufacturing industries, especially those related to key technologies, in the GDP, as it is difficult to maintain a high TFP growth rate by depending on the agricultural and service industries.

To achieve such an industrial structure, the authorities should adjust the labor force distribution. Global experience suggests the working population declines in the primary industry and increases in the tertiary industry with the increase in per capita income and improvement in people’s living condition.

In 2017, the working population in China’s agricultural industry was about 27 percent of the total workforce, but contributed only 7.9 percent of its GDP. If only 4-5 percent of China’s workforce were to work in the primary industry to generate 3-4 percent of its GDP, more than 20 percent of the country’s labor force has to shift from the agricultural sector to the secondary and tertiary sectors. But that would mean large-scale redistribution of workers, which could create serious problems in many fields including public services and education.

Third, the number of people aged 65 or above in China is likely to account for 23 percent of the total population in 2035. In comparison, when Japan’s per capita GDP reached 35,000 international dollars in 2004, only 14.15 percent of its population was aged 65 or above. Which means China faces a more serious aging population problem. Today, China’s median population age is about 37 years — similar to that in the US — but in 2035 it will be 46 years. So China’s aging population will pose a big challenge to the labor market, industrial structure adjustment and the country’s overall development.

Fourth, China’s urbanization level is about 60 percent, but it is estimated to increase to 75 percent, even 80 percent by 2035, which will create more challenges for the household registration system, public services and public fiscal expenditure. These problems demand greater attention.

The authorities also have to maintain a relatively high level and pace of research and development. China’s investment in basic research accounts for only 5.5 percent of the overall R&D investment. The corresponding figures for the US and France are 17 percent and 25 percent. Which means China’s long-term development requires more investment in basic technologies, in the absence of which its high-quality and healthy development could suffer.

Moreover, investment will be the main momentum of China’s economic growth for a long time to come. But given that A share listed companies’ return on investment is only 3 percent — a rather low rate — the investment environment needs serious improvement.

In terms of consumption, the household consumption rate should reach 58 percent by 2035, whereas the figure is only 38-39 percent at present. To ensure it increases by 20 percentage points, the authorities should take measures to improve people’s incomes, narrow the income gap, curb the rising housing prices and provide more high-quality products and services.

The best way to solve these long-term structural problems is to further deepen reform and openingup, which would enable the market to play a pivotal role in resource distribution.

For four decades, China’s development model has provided a solution to these problems: further opening-up and seeking feasible solutions. The problems will be solved if China’s experience of four decades of reform and opening-up is anything to go by.

The best structural way to problems solve these is longterm to further deepen reform and opening-up, which would enable the market to play a pivotal role in resource distribution.