Liu Shijin, former Vice-Minister and research fellow of DRC

Research Report No.191, 2007

I. Chinese Economy Is at a Major Turning Point

Chinese economy has maintained an average growth rate of more than 9% for nearly 30 years. The history of industrialization indicates that only the Republic of Korea, Singapore and China's Hong Kong have been able to maintain an average growth rate of more than 7% for 40 years. Because of different historical backgrounds, industrialization in developed countries and regions has required different lengths of time. The forerunners in industrialization required longer time but their average growth rate was also relatively low. After World War II, some economies were noted for fairly high growth rates and shorter lengths of time, but few of them could maintain a high growth rate for 30~40 years running. The development of some economies such as Brazil and Argentina in Latin America became stagnant after a rapid growth for a period. Even the emerging industrial countries in East Asia, which have been regarded as typical successes, also suffered from the shock of the 1997 serious financial crisis. Earlier, the old industrialized countries had also seen their development process broken or seriously impeded by economic crises and wars.

The above three countries and regions, which have maintained rapid growth for 40 years, are all relatively small economies. There has been no exception with major economies. At a time when the Chinese economy has maintained a rapid growth for a long time and its gross domestic product has been expanding rapidly, inevitably there have been some positive or negative comments both at home and abroad on the prospects of China's economic development, such as the notions of "China opportunity", "China collapse" and "China threat". As far as the Chinese economy is concerned, it has truly experienced some important changes that could signal a noteworthy turning point. Beginning in 2003, the growth rate of the Chinese economy has exceeded 10% for four consecutive years. In 2006, the GDP exceeded 21 trillion yuan and the per capita income reached 2,000 dollars after passing the 1,000-dollar mark. The newly added fiscal revenue exceeded 700 billion yuan, which was almost equivalent to the total fiscal revenue for 10 years. While the gross scale has changed, the structural changes and contradictions have also become more conspicuous.

-- The production and consumption of energy and other important resources have been growing rapidly. For example, some people once held that steel production totaling a little more than 100 million tons would be enough for China; in 2006, China's steel production exceeded 460 million tons.

-- The environmental pressure has been unprecedented. If resources may have some room for adjustment through imports and substitutes, environmental capacity has little room for adjustment because it is immovable.

-- The prices of many production factors such as land and labor have been on the rise. They used to constitute a low-cost advantage for China's economic development. Investigations in some regions along the southeast coast indicate that the wage of ordinary labor has been rising at an average annual rate of 15~20% in recent years. The rise in land price was even more dramatic, with the price of the land for productive purpose being more than doubled in some places.

-- While the economy as a whole has been growing rapidly, the gap in regional development has not narrowed accordingly. Instead, it has widened in some places. The gap in regional development is widened by the gap in urban-rural development.

-- Social contradictions have been on the rise in some aspects. Mass incidents are often triggered by relocation, land expropriation, worker layoff, social insecurity, bureaucracy and corruption. The social destabilizing factors should not be ignored.

-- China is involved in international economic activities on a growing scale. The "China factor" has become increasingly noticeable. The country's foreign exchange reserve has exceeded 1 trillion dollars, the highest level in the world. In the past two years, trade surplus has exceeded 100 billion dollars, international trade friction has increased and trade imbalance has constituted a grave challenge.

Naturally, the above factors are not all of the new changes. And most of these phenomena existed before. The reason why they are called "new changes" is that in a sense, they have entered a "turning point". Here we need to consider two inter-related questions: Have we entered or are we entering a new development period that is quite different from the past ones? If we have entered such a new period, can the existing mode of development effectively deal with many contradictions and challenges facing us so that the Chinese economy can maintain the momentum of a sustainable development?

What can be concluded is that we have entered or are entering a new period of development, but how to summarize the characters of this new period remains for discussion. It is difficult for the current development mode to deal with and contain the emerging contradictions and challenges in the new period, and transformation of development mode therefore is inevitable. This paper discusses a few of important issues on the transformation of development mode.

II. What Is the Essence of Resource and Environmental Pressures?

Economic development always confronts resource and environmental constraints. In recent years, the growing pressure arising from resource and environmental constraints has been a result of the co-action between resource endowment, development period and system conditions. Although China is a country with a vast territory and rich resources, its per capita possession of most resources is lower than the world's average level. When other conditions are identical, the resource constraint confronting China is worse than the countries and regions with better resource endowment. The intensity of resource consumption, which shows an inverted U shape, varies in different periods of industrialization. The intensity rises faster in the period when the heavy and chemical industries develop at an accelerated pace and their proportions rise. China's economic growth in recent years has been precisely in this period. Despite a fall in the technical indicators of energy consumption in recent years, the overall amount of energy consumption has become higher because of the rising proportion of energy-consuming industries. While resource endowment cannot be changed and development period is insurmountable, the system and policy environment has the greatest room for improvement. There are many such examples in practice. The enterprises, which are in the same industry and have roughly the same development conditions, can vary greatly one another in the intensity of resource consumption and environmental protection. This is primarily because they are in different system and policy environments.

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