'New normal' needs new interpretation

BEIJING - China's economy has entered a "new normal" and those fretting over disappointing data in traditional sectors, will have to adapt.

The structure of China's economy has changed and traditional measurements, including GDP growth and industrial output, are insufficient to evaluate and predict economic performance.

True, according to traditional measures, China's economy is losing steam: GDP growth slowed to its weakest pace since the global financial crisis and is widely expected to post its lowest annual rate in a quarter of a century this year; industrial output increase also slowed, to 6.2 percent last month, from the double-digit rates regularly recorded before. Other indicators, including power consumption, cargo freight volume and new bank loans, also point to weakness.

These indicators, however, increasingly tell only half the story as China is now running a two-speed economy.

A major characteristic of this two-speed economy is the emergence of the services sector, which now accounts for half of China's GDP.

While the industry loses momentum, services are prospering. Tourism revenue, theater box office returns and financial services revenue all registered strong gains.

Retail sales growth is consistently above 10 percent each year, supported by a sound labor market and stable wages. Hi-tech industries also reported stronger-than-average output growth.

Despite moderation in growth, the economy is moving in the desired direction, or the "new normal." Yet the moderation is what policy makers have been expecting -- a by-product of structural reform and the short-term pain to be paid for long-term gain.

Given the size of the economy, overdependency on investment and trade is no longer tenable. Instead of temporary fixes such as quantitative easing and competitive currency devaluation, the country chooses structural reform.

The economic restructuring has challenges, during which some traditional industries will suffer and decline -- steel, for example -- while others will be boosted on the back of domestic demand, innovation and government support.

The divergence is unavoidable and will be an evidence that the reform is working as intended.

Inevitably, though, rebalancing the economy will be a slow and bumpy process and, in short term, there will be times when some investors and analysts focus too much on traditional indicators. But, to observe the dynamically changing economy, a more integrated measure for both quantity and quality are needed.