The Chinese economy undergoes stable adjustment in 2013. The GDP growth rates for the first three quarters stood at 7.7%, 7.5%, and 7.8% respectively, and the growth rate for the entire year is expected to reach 7.6%, a significant slowdown compared with 9.3% in 2011 and 7.7% in 2012. But the scaled-back forecast was widely interpreted as conducive to a sustained development model of the economy. Moreover, the recent rise of PMIs(Purchasing Manager’s Indexes) indicates the fourth quarter’s “progress in stability” in economic performance. All these signs are the result of external factors such as the sluggish global economic recovery and internal factors such as the market’s positive expectations for further government reforms.

On the other hand, in terms of the economic structure, the adjustment is not moving in the direction as the government planned. The social retail goods in the first three quarters grows by 11.3% year-on-year, lower than the 12.1%, 13.8%, and 14.8% in the previous three years respectively, attributable to the Party’s disciplinary measures on wasteful spending, consumers’ buying power dampened by rising housing prices, and the slowdown of pay-rise. In terms of investment, the new leadership is unlikely to introduce a large-scale stimulus package for investment, except a number of “micro-stimulus” measures to grow energy-saving and environment-friendly industries, stimulate investment in infrastructure building, and encourage non-governmental investment. This year, consumption is unlikely to replace the role of investment as the biggest contributor to GDP growth, as it happened in 2012. A WB (World Bank) expert commented that the proportion of investment and consumption in GDP is not the key; the key is the level of innovation and productivity.

The external “rebalance” process moves on. If China’s trade sector is evolving from “large export, small import” to “large export, large import”, then FDI in China is evolving from “large inflow, small outflow” to “large outflow, small inflow”, an important variant for the rise of China’s international standing. Though it is difficult to achieve the target of a 8%  growth rate by the end of this year in terms of trade volume, China is only years away from being the world’s biggest trader. In fact, it was already the third biggest investor globally last year. According to China’s Ministry of Commerce statistics, between January and May, China’s non-financial FDI stood at 34.3 billion US dollars, a year-on-year growth of 20.3%, and the foreign capital it attracted at the same period grew by 2-3%. It once registered negative growth at the end of last year and the beginning of this year. China watches closely its evolving external environment and at the same time is becoming an important forcer influencing the outside world. For example, the slowing growth registered in its neighboring countries is the direct result of the slowdown of the Chinese economy.

Generally, China has entered a transitional period when the fundamental issue is that the advantage of cheap labor is fraying with no other advantage coming into its place, and institutions and mechanisms which help to optimize resource allocation, facilitate the adjustment and upgradation of industrial structure is not yet full-fledged. First, the rising costs of labor and resources. Recent statistics showed that of all the oil China uses, 60% are imported from foreign resources and that imports of mineral resources and agricultural products will also increase. Second, a number of sectors face the problem of overcapacity. How to absorb and reallocate resources is the key to China’s successful economic transformation. Overcapacity is the common headache for nearly all of China’s traditional industries, including steel and iron, cement, textile and garment industries, and emerging industries such as the solar energy sector. Third, the low-efficiency financial sector, over or inadequate bank liquidity, a real economy disconnected with the financial sector, and mis-allocation of relevant resources. Local government debts and the expanding shadow banks are creating greater financial risks. Fourth, unfair income distribution and social injustice remain the bottleneck of the economy. Urban-rural imbalance, imbalanced development among different industries, over-burdened corporations are not only social problems but also economic issues. Fifth, new international trade and investment rules are being made. China is again facing a torn situation of “either progress or retreat”. 

Economic reform is the new leadership’s priority and the central government has set out a framework plan. Its full import can be summarized as “lay equal emphasis on both internal and external affairs and take addition and subtraction measures”. Internally, it requires to accelerate urbanization, promote social justice, find new engines of economic growth to facilitate economic transformation. Externally, it is imperative to proactively respond to the realignment of global trade and investment rules, launch the Shanghai Free Trade Zone, and push forward greater reforms through opening up wider to the outside world.
   

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