China on the way to more quality growth

THE fear of continuous slowdown of economy and its reverberations on the capital market areincreasingly impacting the world. While many are wondering what is happening in China,some claim that the Chinese economy is too difficult to understand. China is undergoing economic transformation from an unsustainable mode supported bygovernment investment and export to a sustainable one mainly backed by innovation anddomestic demand.

The faster the transition process, the more destruction it will bring to the old sectorsrepresenting the old growth model and provide more space to the new sectors representingthe new growth model. For some Chinese, it is the winter of despairs; for many others, it isthe spring of hopes. Economists had been calling for and discussing transition for many years but not muchhappened. Although exports fell after the subprime crisis, government investments rose tosmooth the impact of the decline in global demand. The transition finally began in 2015.

According to official statistics released on Tuesday, China's GDP growth rate was 6.9 percentin 2015. Though the figure is much higher compared with mature economies, it is the slowestsince 1990. With such a slow growth, which may just be the start of a continual slowdown, people mayworry about China's many problems that were expected to be solved in longer term duringfast economic growth, such as overcapacity, possible burst of real estate bubble, possiblemassive default of local gov- ernment debt and possible capital flight.

But with the pressure of possible crises, the transition can happen faster. In 2015, the tertiaryindustry contribution to GDP was 57.70 percent, 7.1 percent higher than 2014's and theconsumer spending contribution to GDP was 66.4 percent, astonishingly 15.2 percent higherthan 2014's. The service sector is increasingly becoming the main driver of growth. Moreover, from thethird quarter, besides the financial department, a broad category called "other services" --which include healthcare, education, law, and accounting among others -- unexpectedlybecame a strong boost of the economic growth.

Since the problems of the old growth mode can occur in a short time and on a big scale, theadvantages of a new growth mode only comes slowly, it is a necessary price for the transitionthat GDP growth rate will gradually slow down. For 2015, with such an improvement in its economic growth structure, a 6.9 growth rate alongwith a stable price index and a stable employment rate are well acceptable. In the future, itwill be difficult to post double-digit growth in GDP.

There are two reasons for that: on the one hand, the demographic dividend is exhausting, theland resources are becoming expensive and the tolerance to environmental pollution isbecoming lower; on the other hand, the contributions of institutional reform and people'sinnovation increase slowly. China is also facing middle-income trap. The trap can become true when there is a corruptgovernment and big difference between rich and poor. But China is different from most otherdeveloping countries in both the social system and their people.

China's society is huge and uniform, which can support a big market and nurture greatinnovations and huge companies. China is lucky to have a strong government to lead thecountry through the transition, especially when the government's policy is now on the righttrack - the government on the one hand takes great efforts to combat corruption and on theother hand promote supply-side reform. Chinese, who put more importance on their family,can tolerate a bigger difference between rich and poor, too.

However, China may still maintain a reasonable fast growth in the future years for threereasons. First, China's GDP per capita is still low, which was about $8,000 in 2015. Second,with most people educated, good infrastructure, increasing application of science andtechnology and an efficient strong government, China is accelerating the transition towards amodern society. Third, Chinese are hard-working people who are eagerly fighting for theirbetter future.

The 2015's data may mean that China is doing a good job in solving its most importantproblem for China's economic transition - - to remove excess capacity while keepingemployment stable. The government's supplyside reform captures the core of China's economic problems. Toremove excess capacity is the first step. In the long run, China needs to find a way to makesenterprise provide products according to the demand of markets.