China's New Development Stage: Challenges and Opportunities

Author: Fan Gang, President of CDI

Editor’s Note: China’s new development stage has many features: independent innovation has become a new growth pillar; the domestic consumer market has grown steadily; large city clusters have gradually formed; green development has become an inevitable trend; and private businesses urgently need to find a way out. On the whole, although China in 2019 will face even more challenges, China's economy will continue to grow in future.

Independent innovation

China is entering a new stage of development, where the driver of growth is independent innovation, moving away from leveraging only comparative advantages to leveraging both comparative advantages and late-mover advantages. China's comparative advantage is cheap labor. Reform and opening-up introduced foreign know-how, which became part of China's knowledge pool and helped form China's late-mover advantage of saving research and development costs. However, imitation means a lack of independent innovation. As global technological barriers become more and more evident and China has gradually approached to leading positions in many fields, China is forced to enter the stage of independent innovation. We should give priority to improving the long-term mechanism for incentivizing independent innovation, gradually weaning it off from government's sponsorship and subsidies, and turning intellectual property into equity which will become a permanent incentive.

Domestic consumer market expansion

Various factors in China account for the decline of savings rate and the increase of consumption rate. GDP per capita in 2018 was close to $10,000, ushering in a stage of high consumption. In the past decade, low-income people have seen faster growth of income, leading to higher consumption. The Internet and e-commerce are highly developed today, promoting consumption tremendously. Many young people are taking out loans for consumption purposes. At the same time, consumption among senior citizens is also upgraded.

Resource efficiency and clean development

The exhaustion of resources has increasingly made improving resource efficiency a priority. Green development has become an inevitable trend. Urgent problems include smog, water shortage, etc. This represents both a challenge and a business opportunity. Companies around the world are faced with the same problems with a common prospect of transformation and upgrading. What matters is how to do better.

Large city clusters

In the past few years, the supply of real estate has been insufficient and uneven, resulting in skyrocketing housing prices in large cities and overstocking in small ones. To solve this problem, the Ministry of Land and Resources of China has announced its decision to increase land supply in large cities and allow collective land to enter the market. Housing prices will stabilize after an equilibrium of supply and demand is reached. At the same time, through upgrading transportation and public services, large, medium and small cities in a region will be able to develop in a more coordinated way to jointly form an ecosystem of metropolitan groups. With urbanization taking up speed, there will be huge opportunities.

In the future, China will see the formation of three super city clusters with a population of 100 to 200 million each, and a number of large city clusters with a population of 30 million to 50 million each. The three super city clusters are the Beijing-Tianjin-Hebei region, the Yangtze River Delta, and the Pearl River Delta. In addition, large city clusters will emerge in areas surrounding provincial capitals.

Reform to support private sector

The central government has successively introduced new measures for reform and opening-up, with new adjustments centered on the development of the private sector. If state-owned enterprises are to acquire private ones to become their largest shareholders, then the nature of the latter will be transformed into that of state-owned enterprises, which will result in them being restricted by SOE management rules, thus losing their vitality. Financial mechanisms can be leveraged or funds be established to allow the partial acquisition of the equity of private businesses and to exit after the market rebounds. This will effectively prevent private businesses from being incorporated into state-owned enterprises, so that they can finally return to the market.