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【Shen Minggao, Ruan Pengfei】Deconstructing the Transformation of Momentum:Growth Driven by Fast Variables and Slow Variables


China’s economic growth is shifting from fast variables to slow variables
Calculated by nominal GDP, China’s service industry as a share of GDP has increased from 33.6% in 1996 to 44.2% in 2011, while the share of secondary industry stood at 46%, which means that China is in non-agriculturalization period. The growth was driven by relatively faster variables. In 2011-2015, the share of service industry increased by six percentage points, while the share of secondary industry decreased by 5.5 percentage points. This marked the beginning of de-industrialization period, and the growth was driven by slow variables.

In the future decade, the increase in slow-variable-driven growth may drag GDP growth rate down to 4%. As is shown by international practice, when the share of service industry exceeds 50%, GDP growth rate stands at about 4-7%; when the share exceeds 60%, growth rate stands at about 2.7%-4.4%. According to the estimation of Monita, China’s potential GDP growth rate will be around 5% in 2025, but it may fall to around 4.0% if the low productivity of service industry is considered. The bottom of L-shaped growth may be 4-5.5%. Reform can increase potential GDP growth, by optimizing the allocation of resources, especially capital, and promoting the shift from a growth model of fast variables and heavy assets from a model of slow variables and light assets. If the reform measures are actually implemented, potential GDP growth rate may reach 5.5% by 2025, and this rate may be the bottom of “L-shaped growth with reform”.

It is the most uncertain of time; it is the most certain of time.
China’s economy has entered new normal. From the perspective of sustainability, this new normal is still evolving in a dynamic process. In this process, it is normal for industries and structures to become divided. Such division manifests as economic slowdown in parallel with rising forces, alternation between liquidity overflow and skyrocketing asset prices, and intertwinement of structural and periodical forces.

To deconstruct the transformation of China and to explicate the new normal, we should not simply deduce the future with the past; instead, we should ravel out future trend from new perspective and adopt new countermeasures.

Undeniably, China’s economy is following the former path of Japan. If we can identify the forks ahead, we can get rid of “middle-income trap” in the mid run and avoid repeating the mistakes of Japan in the long run. Time is limited.

During the evolvement from old normal to new normal, economic slowdown is fast variable, and the future driving forces are mostly slow variables. Slowdown is faster than going up, which is one of the basic landscapes of China’s economic slowdown in transformation period. In a short-term, this is hard to change.

The major conclusion of this paper is: during the shift from fast variables to slow variables, potential GDP growth rate driven by service industry may fall to 4% in the future decade. Substantial reform, with the improvement of productivity as its core, may raise potential GDP growth to 5.5%. Therefore, we suggest that China should follow the major trend and give up the growth target of 6.5% to alleviate the sequela of keeping steady growth, and should accelerate reform and prevent meltdown with fiscal policies, so as to keep the growth rate above the red line of 4-5.5%.

Download attachments: Deconstructing the Transformation of Momentum:Growth Driven by Fast Variables and Slow Variables.pdf