The Current Chinese Economy and World Economy Are Both in a “New Normal State”

Chen Fengying Former Director of World Economics Institute, China Institutes of Contemporary International Relations (CICIR)
The year 2015 will be a year of troubles with increasing uncertainties. Amidst various risks and challenges, the overall situation will present a picture of sub-healthy and weak growth, projecting an unprecedented “new normal state”.
I. Medium and Low Growth Will Constitute the Main Feature of World Economy under “the New Normal”
In retrospect, world economy in 2014 was not derailed from growth, but the growth pace was slower than expected. Seasonal shrinkages appeared in the economies of the U.S., Europe and Japan, in the economies of Euro zone and Japan in particular. The economies of “BRICS” and other emerging economies were barely satisfactory. Economies of Russia, Brazil and some other countries slumped. The prices of bulk commodities kept going down owing to weak demands and stronger US dollars. The price of oil dropped drastically owing to supply surpassing demands, OPEC refusal to cut down production for the protection of the price in order to ensure market shares and geopolitical conflicts between the U.S. and Russia, which led to sharp currency devaluation, capital flight and spread of panic in Russia and other resources-exporting countries. At the beginning of 2015, owing to the impact of a number of unfavorable factors, international oil price broke down. Russia has won temporary victory in its efforts to safeguard its Rubles, however, its prospect remains critical.
In 2015, world economy can be expected to maintain an overall momentum of moderate growth. According to the UN report on “World Economic Situation and Prospects 2015”, world economy grew by 3.1% in 2014, 0.1% higher than that in the previous year. Global economic growth is forecast to increase over the next two years at 3.5% in 2015 and 3.8% in 2016, better than the average growth rate (2.7% from 2007 to 2011) since the crisis. Growth of international trade will return to 4.5% and 4.9%, also better than the average growth rate (2.5% from 2007 to 2011) since the crisis. This is basically identical with the recent IMF forecast.
Specifically, the main attractions in the world economic situation are: most of the emerging market economies, such as China, India, Indonesia and Black Africa, will maintain fairly rapid growth. The U.S. and UK will witness a sound economic recovery. In addition, loose monetary policy and the fall of the prices of oil and other bulk commodities will promote the development of global economy in 2015 and prevent global economy from sinking into recession. In particular, driven by the “one belt and one road” initiated by China, the Asia Infrastructure Investment Bank and Silkroad Fund will be launched in Asia. Investment in infrastructure and connectivity will be accelerated. This will enhance regional infrastructure development, stimulate the increase of regional investment and promote trade, cultural and people-to-people exchanges.
Meanwhile, world economy still faces critical challenges. As the stimulated recovery is over, adjustment-oriented decline has begun and periodic expansion has not arrived, all economies are pressing ahead amidst structural adjustment and development transformation. Potential economic growth rates are generally going down and growth lacks new driving force and new vitality. What’s more, the Federal Reserve will raise interest rate at an appropriate time, prices of international bulk commodities remaining low, the development of emerging market economies facing mounting risks and European central bank implementing excessive QE monetary policy. All these will ignite a new round of interest-reduction and a wave of currency devaluation. The division of monetary policies of major countries will intensify the complexity of international economic environment and give rise to financial and economic disorder. The “loose” and “tight” monetary policies will impact the emerging market economies and plunge them into an awkward position. The drastic tumbling of international oil price has led to the monetary diving of the Rubles, skyrocketing of inflation, capital flight and market panic. Other emerging markets find it hard to keep aloof from the situation.
II. Divided Development will be the Main Trend of World Economy under the “New Normal”
At present, the overall global economy under a state of “low temperature” is uneven in the momentum of growth.
In the developed countries, the US economic recovery is dynamic. According to latest IMF forecast, following a 2.4% growth rate in 2014, the US economy will increase by 3.6% in 2015, topping the Group of 7. What’s more, the momentum of US economic recovery can be sustainable with an accelerating speed. However, progress can hardly be made on such important issues as revitalization of manufacturing industry, educational reform, seeking of new economic growth areas and reform of the “two Party courtyard battle”.
Japanese economy has picked up a little but still faces difficulties. IMF has downgraded its economic growth in 2014 to 0.1%. The growth rate in 2015 has been revised and lowered to 0.6%. The third arrow of “Abeconomics” evades the important and dwells on the trivial, existing in name only. It has to return to the first and second arrows, i.e., taking the old road of financial expansion and currency devaluation. Japanese economy seems to be entering the third “lost decade”.
European economy has turned a little better than it was during the crisis period. However, its recovery is depressed. The economic growth rate in the Euro zone in 2014 was only 0.8%. In 2015, IMF uplifts it a little to 1.2%. Implementation of QE monetary policy may ameliorate the problem of liquidity. However, without the removal of structural and systemic factors of restriction, it may face the risk similar to Japan’s “lost decade” in future. As a matter of fact, Europe in 2015 faces critical challenges both in economic development and political relations. EU even may face the test of split. US think tank Eurasia Group recently released a report on “Top 10 Risks” in 2015, listing the problem of Europe at the head of the top ten risks. It believes that the cohesive force among European countries has been severely challenged because of economic problems. After the general election in Greece, the risk of split for the Euro zone has increased. In addition, sanctions against Russia and Russia’s counter sanctions have strained Russian-European relations. The sovereign debt crisis has taken a heavy toll of European economic strength. Economic recovery is weak not only in the crisis countries but also in major Euro zone countries such as France and Germany. The Euro has kept devaluating while facing the pressure of deflation. The problem of internal unity has re-emerged. All these will affect the economic recovery of the Euro zone. In European economy, only British economy outshines others. The UK remains aloof from the Euro zone and adopts independent and loose financial and monetary policies. It carries out necessary structural adjustment and stimulates economic recovery. In particular, the sustainable and rapid development of service industry has become the chief engine for economic recovery. It is anticipated that the British economic scale will overtake that of France and return to the fifth place in the world in 2015.
The economic growth of emerging markets and developing countries as a whole is still higher than that of the developed countries. However, internal development is conspicuously divided. The momentum of economic development in Africa is relatively strong. The developing economies in Asia remain the fastest region in the whole world. According to IMF forecast, developing economies in the Sub-Sahara region of Africa and in Asia will reach 4.9% and 6.4% respectively in 2015, higher than the average growth rate of 4.3% of emerging markets, much higher than the 2.4% of developed countries. This is a spot of attraction of world economy. The differences of development become conspicuous among the BRICS countries. China and India will maintain fairly rapid economic growth. The latest IMF forecast shows that the economies of China and India will increase by 6.8% and 6.3% respectively. International institutions are generally optimistic about China’s economic outlook. They believe that China’s economy is amidst rebalance. It is seeking a slower economic growth within controllable scope so as to achieve sustainability of economic development. The economic development of Brazil and Russia is somewhat difficult. In particular, under the impacts of downfall of oil price and US-European sanctions, Russian economic recession is almost a matter of certainty in 2015. According to IMF forecast, Russian economy will decline by 3% and 1% in 2015 and 2016 respectively. President Putin himself also admits that Russian economy increased by 0.6% in 2014 and it will get out of trouble of the most difficult circumstances within two years.
III. Global Economic Growth will Project a “Double Engine” Posture under the New Normal
Economic recovery of developed countries is getting stable. Emerging market economies are growing at a less vigorous momentum. This makes world economy return to the double-engine period. However, there are two countries which merit high attention: the U.S. and China.
 On the one hand, the US economy outshines other developed countries while the Chinese economy stands head and shoulders above all other emerging markets. On the other hand, the U.S. is accelerating its steps for economic restructuring with conspicuous reform achievements while China demonstrates the firmest determination for reform and entrepreneurship featuring the completion of the top-level planning of China’s comprehensive deepening reform. In the years to come, the growth of global economy will be led jointly by developed countries headed by the U.S. and emerging markets headed by China. According to the estimates of IMF, Chinese and US economies would account for 13.4% and 22.4% of the global output in terms of US dollars in 2014, with their contributions to the global economic growth reaching 30.5% and 22.3% respectively. In 2015, Chinese and US economies will increase by 6.8% and 3.5% respectively, still the fastest in the emerging markets and principal developed economies. Their total contributions to the global economic growth will approach those in 2014.
In the years to come, along with its economy entering a new round of strong growth, the US contributions to global economic growth will increase, while China, in spite of the slow-down of its economic growth, will remain an important engine for the global economy as the effect of China’s economic scale will become conspicuous. According to IMF forecast, in the next five years (2015-2019), Chinese and US contributions to global economic growth will reach 21.7% and 19.9% respectively in terms of the exchange of US dollars. So long as the US economy does not get into big trouble, even if the economies of the Euro zone and Japan are depressed, the negative impacts can be controlled. In the emerging markets, so long as China can maintain a high growth rate at about 7%, the emerging market economies as a whole will not get into bit trouble even if some emerging market economies were in temporary depression. This is because China’s demands will prevent the prices of bulk commodities from excessive dropping. China’s investments can, to a certain degree, resist the impacts of capital flight caused by the Federal Reserve’s increase of interest rates. It is crucial that China should do its own things well, concentrate its energy, seek progress in stability, promote growth, accelerate reform, transformation and upgrading and treat the new normal with a common heart. This will constitute the biggest contribution to the global economy.
IV. Risks of Global Economic Growth under the New Normal are not to be Trifled
Under the new normal, economies of all countries are in a sub-healthy state. Like the Chinese economy, the world economy will also face a “digestion period” following the withdrawal of stimulus policies, “throes period” of structural adjustment and transformation and “gear-shift period” from medium-high gear to medium-low gear. The pileup of three periods will much complicate the environment of global economy, plunging it into the trouble of “four highs, four lows, four divisions, three unbalances and three competitions”, i.e., high unemployment, high debts, high age and high lever; low demands, low prices, low inflation and low growth rate; division of growth, division of policies, division of society and division of patterns; unbalance between the virtual and the entity, unbalance between supply and demands, unbalance between investment and speculation; competition of rules, competition of modes and competition of systems. These constitute the new normal which never took place in any of the previous periodic adjustment.
The main causes for the potential slow-down of global economic growth rate are as follows: First, the after-effects of financial crisis are yet difficult to be uprooted, the follow-up impacts of such crises as high debts, high unemployment and high deficit still exist. Second, the aging of population has become a common problem facing the developed countries and the emerging economies; the pension burden and decrease of working-age population have slowed down the potential growth rate. Third, in the medium and short term, there will hardly be major technological breakthroughs, labor productivity improvement is anemic. These unfavorable factors will drag on the global potential economic growth rate, downgrade the economic growth track of all countries in general and it would be difficult to return to the level before the crisis in a medium and short term.
V. The Chinese Economy Remains a Chief Engine for Global Economy under the New Normal
In the 35 years of reform and opening-up (1978-2012), China’s economy increased by 9.8% annually in average. This was the high-growth period of China’s economy. The Chinese economic scale has upgraded to the second place from the tenth in the world. Trade in goods and the manufacturing industry rank the first in the world, surpassing those of the U.S. However, a country or region, after a “golden period” of sustained and rapid economic development, usually will enter a difficult “gear-shift period” from high to medium-low growth. In the recent three years, China’s economic growth has slowed down, with growth rate at 7.7% in 2012 and 2013, lower than the average growth rate in the past 30 years. In 2014, it further slowed down to 7.4%. It might continue to slow down, from high-growth to medium-high growth. This will constitute the new normal of China’s economy.
Nevertheless, in comparison with global economic growth, the Chinese economic growth is still in the leading place. According to IMF estimate, in 2014, world economy and international trade increased by 3.3% and 3.1% respectively, the economy of developed countries and that of emerging markets and developing countries would increase by 1.8% and 4.4% respectively. In comparison, in 2014, the increase of Chinese economy, in spite of slow-down to 7.4%, was still far ahead of that of global economy and much higher than those of the U.S., Europe, Japan and other emerging major countries. The portion of Chinese economy in the world economy was upgraded to 13.3% in 2014 from the 12.7% in the previous year. In particular, the contribution of the Chinese economy to the increase of global economy still reached 30.4%. It remained the largest global engine, surpassing the 22.3% of the U.S. Against the backdrop of general slow-down of global economy, China’s economy was able to maintain a growth above 7%. This was the result of the Chinese government’s adoption of such measures as “strong reform, moderate stimulus, structural adjustment and benefiting the livelihood” and transformation of the development mode. The achievements have not come easily.
Under the new normal, the various advantages which supported the high-rate growth of China’s economy in the past have been weakened. Some of them have become bottlenecks, such as population dividends, land dividends and environment dividends. The extensive growth mode which over-drafted ecology at the expense of environment has come to an end. The future factors to support sustainable economic development will be talent dividends, new-type of urban construction and reform dividends, innovation dividends and rule of law dividends, etc. The Chinese economic development mode will change from the extensive growth mode featuring scale and speed to the intensive growth mode featuring quality and efficiency. The economic structure will shift from reliance mainly on incremental capacity to equal stress on adjustment of the stock and optimization of the incremental. The driving force for economic development will shift from traditional growth areas to new growth areas. The entire economy will evolve to a phase of higher-form, more complex division of labor and more rational structure. The “old normal” featuring unbalance, un-coordination and un-sustainability will be replaced by the “new normal” featuring putting the people first, balanced coordination and green development. Economic growth will take full employment and income increase as the main objectives. In short, regarding the Chinese economy under the new normal, the growth rate will be “down a stage” while the growth quality will be “up a stage”. Just as Premier Li Keqiang pointed out: “The development we refer to means the increases of employment and incomes, the enhancement of quality and efficiency and development of energy conservation and environmental protection. It also means scientific development in conformity with economic laws, social laws and natural laws.” This will be the new trend and new blueprint of China’s economic development.

*Chen Fengying is Former Director of World Economics Institute, China Institutes of Contemporary International Relations (CICIR)