Outlook not that pessimistic

A new round of reform is needed to inject vitality into the Chinese economy and make its growth sustainable

China's declining economic growth rate has been discussed at different forums at length. Some scholars argue that China has exhausted all its advantages in demographic dividend, globalization and reform, and therefore the decline is unavoidable. There is nearly a consensus that China's economy will slow down, and the debate is mainly on the actual rate of growth.

We should respect the economics cycle and not harbor the illusion of registering further double-digit growth. Our research shows that the fast-growing economies, with the sole exception of Taiwan, registered a drop in their growth rates in the fourth decade of their economic development.

But at the same time, we should not be pessimistic about slower growth. China's economic growth is not destined to drop. A relatively strong growth for another decade or even longer can be realized if China can push forward its reform and innovation plan, build up human resources and participate in global governance.

Some economists have forecast that China's demographic dividend, which means a high percentage of working-age population, will end in 2015. The sixth population census shows that China's population growth is much slower than what the policymakers had expected, and the drop in the number of children and increase in the number of senior citizens have been beyond expectations too.

Australian economists Rodney Tyers and Jane Golley, however, say, China's demographic dividend can last until 2030 if the actual working population, instead of the working-age population, is calculated. The number of workers will increase by including workers from the traditionally non-working age group. For example, extending the retirement age can turn non-working-age people into workers.

Besides, thanks to the development in China's education sector the number of skilled, well-educated workers is increasing. This will offset the negative impact of the declining working-age population and prepare China for a knowledge-based economy.

It is true that China is losing its traditional advantage of exporting products at low costs. For three decades, China's economy relied heavily on exports to the United States and European countries by taking advantage of its cheap labor. But with the return of protectionism to the world stage after the global financial crisis, China may lose the benefits it has gained from globalization.

China, nonetheless, can gain new benefits by helping devise the rules of globalization, mainly in the areas of financial regulation, international monetary policy reform, developmental issues, security and energy.

On one hand, changes after the global financial crisis require constant renewal of global rules, which offers China an opportunity to take part in global governance. On the other, a change in the power balance between developed and developing countries has put China in a better position to have a greater say in international issues.

A reform in the international monetary policy and internationalization of the yuan will not only reduce the loss of China's foreign reserves, but also place the country in a better position for global financial competition. China should try to play its due role in the price-setting mechanism of international bulk commodities and gain an upper hand in international negotiations.

It should also take part in stipulating the rules related to climate change, including reducing energy use and carbon emissions, building low-carbon economies and carbon trade, which will influence future industrial development and the share of responsibilities and costs among different countries.

A new round of reform is crucial to China's economic growth. China's reform has been propelling growth for more than three decades, but its benefits are dwindling, and will continue to do so until we initiate a new round of reform.

The fundamental issue of reform is the relationship between the government and the market. We should press ahead with both market reform and government reform. Market reform includes reform in the land use system, marketization of the interest rate and development of the capital market. The government, on its part, should reform the hukou (house registration) system, and create an equity system for urban and rural workers.

The government should also draw a clear line for its responsibilities and functions. It should increase investment in social development and human resources, ensure social justice and fairness, provide public goods and services, and see to it that low-income people have equal access to these goods and services.

Also, it should reduce its intervention in microeconomic activities, make the market more accessible to private players, break its monopoly in certain sectors, simplify the administrative approval system and improve economic efficiency.

China's reform has reached a crucial stage where different interests are entangled with each other. The leadership has to show wisdom, determination and courage to push forward the reform, for only if the reform is successful can China's economy be revitalized and continue on track for years to come.

The author is director of the Macroeconomics Research Department at the Institute of Economics under the Chinese Academy of Social Sciences.