Hou Yongzhi, Director-General and Research Fellow & Liu Peilin, Deputy Director-General and Research Fellow, Department of Development Strategy and Regional Economy, DRC

As the world’s second largest economy, China’s economic growth has attracted much attention. China’s GDP growth fell from 7.3% in 2014 to 6.9% in 2015. This growth rate is in accord with Chinese government’s expectation of “around 7%” made in early 2015. What about China’s economic prospects of 2016? People from both home and abroad are much concerned about this issue. Currently, Chinese economy is going through structural transformation and speed shift. Economic factors like labor supply, resource and environmental cost, space for technological catch-up and external market demand are also changing. However, whether viewing from demand side or supply side, China still has the potential for a fast economic growth; and based on the existing policy effect and future selectable policy tools, China surely has the conditions to realize the growth potentials.

1. Consumption and investment demand will continue to boost China’s economic growth

First, enormous consumption demand will be generated by rising resident income, changing structure of consumptionentities and widening consumption choices. It is shown by the rules of various countries’ consumption changes that following income rises, residents’ income will generally rise and consumption structure will continue to upgrade; this upgrading will become extremely fast when a medium-income country is moving towards a high-income one. China is now a medium-income country, heading towards high income club. There is enormous new space for consumer demand growth. Let’s take automobile demand as an example. In 2014, car ownership in China was 106 cars per thousand people; while in the United States, the number is 800 cars per thousand people; in Germany, 620 cars per thousand people; in South Korea, 340 cars per thousand people. Using South Korea as a benchmark, we have the space for three times the amount of cars for civilian use. In addition, consumers born after 1980 are gradually becoming the leading force in consumer market and their propensity to consume is apparently higher than people born before 1980. According to Ali Research and BCG, among China’s middle class, consumer spending by people born after 1980 is 40% higher than people born before 1980. Progress in information technology and transportation technology allows consumers to have a wider choice. According to Alibaba, on Singles’ Day of 2015, transaction on Tmall reached over 91.2 billion yuan, increasing nearly 60% year on year. It is the application of Internet technology and the modernization of logistics technology that makes this huge amount of consumption possible.

Second, further deepening of capital will generate enormous investment demands. Capital deepening means the enlargement of per capita capital stock. According to the newest data of different countries released by the University of Pennsylvania, and measured by PPP, China’s per capita capital stock in 2011 wasrespectively less than 1/5 that of the United States and 1/4 that of Japan. This means that the space for investment growth in China is enormous. Urbanization will also release huge investment demands. Urbanization level in China has surpassed world average level but there is still a great gap compared with developed countries and countries with equal per capita income level. Development space for urbanization is huge. The transportation and underground pipe network construction inside and between cities, urban environment renovation and old city reconstruction will all generate new demands continuously. The upgrading of tradition industry and development of emerging industry will stimulate huge investment demand. Along with the implementation of Made in China 2025 strategy, transformation and upgrading of tradition industry will speed up. Emerging industries like information technology, high-end equipment, advanced material and biomedicines will have larger development space. All these will generate huge demands for new machinery equipment. Imbalance between rural and urban development also enjoys great investment potential. On the one hand, huge investment demand will be generated when infrastructure modernization is improved and public service competence is enhanced. On the other hand, development imbalance will lead to industrial transfer which will also generate new investment demands.

2. Supply side will greatly stimulate future economic development

First, there are enough space and firm basis for efficiency improvement and technical progress. Technical level, to a great extent, decides the value-added rate of the industry and vice versa. At present, value-added rate of Chinese manufacturing industry is only 20%, well below Germany’s 32%, Japan’s 34% and the United States’ 35%. This means that technical level and efficiency in China still holds great space for improvement. On the other side, China’s technical catch-up competence has been enhancing. China is now the second largest country of R&D input and is implementing innovation-driven development strategy, especially “mass entrepreneurship and innovation” strategy. Innovative achievements will spring up once R&D input increases and relevant strategy is implemented. Moreover, human capital is accumulating quickly in China, which now has the largest college and university graduate number around the world. In 2015, the number was 7.5 million, larger than the total population of some European countries. High-quality labor’s rapid growth is good for technical advancement and will help to transfer technical achievements into real-life productivity.

Second, saving rate in China remains high; capital accumulation still has great competence. Japan is one of the first countries to catch up with the West, and the Four Asian Tigers are the second movers. In both cases high saving rate has always constituted an important bolster for their fast economic growth. In the past 30 years, the average national saving rate in China reached 42.1%. It’s 1.8 times higher than the global average level and 1.9 times the developed countries’ average level. In recent years, this rate has increased to about 50%. High saving rate is due to low dependency ratio and the tradition of thrifty. Aging tendency will become more and more apparent in the future but China’s cultural tradition will not change in the short run. All in all, high saving rate will continue in China, laying necessary foundation for capital accumulation.