Media International Exchange 2015.07.01
Since early August last year when the People's Daily ran three consecutive days of commentary on the "new normal", this phrase has taken hold as shorthand for China's basic approach to economic policy management.
Chinese government explanation of the "new normal"
The Central Economic Work Conference held in December last year styled the "new normal" as follows:
(1) Transition from high-speed to medium-to-high-speed growth
(2) Transition from an extensive growth model focused on the economic growth rate to an intensive growth model emphasizing high-quality, efficient growth
(3) Transition from an economic structure prioritizing expanding supply capacity to one focused on appropriate supply capacity
(4) Transition from traditional economic development promotion capacity to a new type of economic development promotion capacity
Reading this explanation by the Chinese government of the "new normal", not only foreigners but indeed most Chinese have probably been left scratching their heads.
Looking to the Chinese economy, employment and prices have remained steady since the second quarter of 2012, while the real estate market too has been staging a gradual return to stability since fall last year. The macroeconomy therefore appears to be maintaining a good balance even as it sustains high but moderately-paced growth. The "new normal" is a policy management approach designed to maintain just this kind of balanced and moderate high growth.
However, many people fail to grasp this bigger picture and instead focus solely on trends in certain economic indicators and economic conditions in certain regions, from which point they jump to the mistaken conclusion that the Chinese economy is stalling and on the verge of a real estate bubble collapse.
While it is admittedly a somewhat rough and ready expression, here I would like to offer a hopefully more straightforward explanation of economic policy management under "new normal" conditions.
Cracking the "new normal"
The easiest way to understand the "new normal" is to see it as shaking off two abnormalities deriving from the misguided economy policy management of the Hu Jintao/Wen Jiabao administration over the decade between 2002 and 2012.
My understanding is that as of spring 2012, the Chinese economy has effectively shifted from an abnormal period to a "new normal" era under the leadership of Xi Jinping and Li Keqiang.
Moderating the speed of growth
The first abnormality under the previous administration was overly rapid growth. The leaders of that administration appear to have thought it desirable to have all industries in all parts of China enjoying prosperity.
As a result, the administration responded to pressure from economic expansionists in central and local government and state-owned enterprises (SOEs) by implementing economic stimulus measures that would please all industries and areas.
Major economic powers such as the United States, China and Japan typically exhibit major disparities in the economic status of different industries and different areas. Attempting to lift all depressed industries and local economies through macroeconomic stimulus measures such as lowering interest rates, boosting lending, and increasing fiscal spending can see those industries and areas that were already doing well ride too high and cause the economy to overheat.
Under the economic policy management of the previous administration, excessive economic stimulus during an expansionary phase did indeed cause the economy to overheat. In fact, inflation was caused three times over the previous administration's 10 years in power, burdening the general public with higher prices.
Because the central government failed to prevent inflation and, once the economy had overheated, rushed into monetary tightening, China experienced major economic fluctuations that left the economy constantly unstable.
Policy operation of this nature might buoy up companies and local governments in the short term but the good times are short-lived and soon induce overheating, whereupon inflation makes life tough for ordinary people.
Since the Xi Jinping administration has been in power, the Chinese economy has evinced medium- to long-term stability in both employment and prices, and while there is variance according to the industry and area, the lives of ordinary citizens have been generally stable.
However, because the administration has prioritized maintaining a moderate growth speed across the economy as a whole, while some industries are doing well, others continue to struggle, with performance across different industries and areas remaining uneven.
Companies and government officials in depressed industries and areas with limited competitiveness are obviously unhappy with the situation. However, instead of coddling these industries and regions with subsidies, the Xi Jinping administration is promoting the weeding-out of uncompetitive companies based on market mechanisms.
This is the first characteristic of the "new normal".
A leaner and muscular economic structure
The second abnormality was the unhealthy nature of China's economic growth. China is currently working to eliminate excess capacity in key manufacturing industries such as steel, cement, glass, petrochemicals and shipbuilding, as well as excess housing stock in third- and fourth-tier cities.
Most of this is the result of the excess investment prompted by the four trillion yuan stimulus package that was instituted to help the country recover from a severe recession following the September 2008 Lehman shock.
The rate of increase for fixed asset investment as a whole has remained sluggish since 2011. Up until around 2010, it was growing strongly at close to 30 percent year-on-year. Subsequently, however, it has continued to slow every year, reaching only 15.7 percent for 2014 and dropping to 12.0 percent for the January-April quarter this year.
This is the result of government policy management aimed at developing a healthier, more efficient economic structure by, for example, reducing subsidies to inefficient companies and constraining bank lending. The aim is lean reform--trimming off surplus fat such as excess capacity and excess housing stock to create a leaner and muscular economy.
The previous administration set overly high economic growth rate targets and focused solely on achieving those targets, paying little attention to the nature of that growth. In the case of both capital investment and housing investment, GDP will grow as long as the amount of investment increases, regardless of the quality of that investment.
However, the inefficient and unhealthy investment resulting from this kind of blind investment generates bad debt, wreaking major damage in the form of deteriorating corporate profits due to the lower operating ratios of future plants, as well as losses from plummeting real estate prices. The measures taken by the Xi Jinping administration are designed to clean up these negative assets left by the previous administration.
As outlined above, the "new normal" means dealing with the two abnormalities characterizing the economic policy management of the previous administration and transitioning to normal policy management.
Prospects for the Chinese economy
If the speed and nature of economic growth become healthier as a result of "new normal" economic policy management, companies will find it easier to sustain profit growth, while the introduction of healthy market competition will weed out inefficient companies and boost China's overall industrial competitiveness.
At the same time, the "new normal" alone will not be sufficient--China will also need to drive through SOE reforms and deregulation to encourage the introduction of market mechanisms before it realizes sustained improvement in its industrial competitiveness.
I predict that China's rapid growth age is highly likely to end between 2020 and 2025.
If the administration backs its "new normal" economic policies with early SOE reform and deregulation, not only will this boost the likelihood of prolonging rapid growth, but China should also be able to reduce the risk of rapid economic deceleration following the transition to stable growth.
Over that time, Japanese companies will benefit greatly from the pace of expansion of their markets in China outstripping the speed of GDP growth.
The potential customer base for Japanese companies is the aggregate population of those cities which have reached a per capita GDP of US$10,000. That population is expected to grow from 100 million people in 2010 to 700 or 800 million people by 2020.
For Japanese companies, protraction of China's high growth era would effectively lengthen the "Chinanomics" era during which they can exploit demand growth in the Chinese market.
High growth in a massive market that will reach triple the scale of the Japanese economy by 2020 could serve as a powerful driver for Japanese economic growth. If the Japanese economy revives as a result of "Chinanomics" in combination with the self-sustaining economic expansion targeted by the Japanese government's "Abenomics," we could see a "new normal" emerge for the Japanese economy.