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Services, consumption key to China's growth

CHINA DAILY | Updated: 2024-11-29 06:53
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JIN DING/CHINA DAILY

Editor's note: At the China-US People's Dialogue, co-hosted by the National Committee on US-China Relations and Tsinghua University's Center for International Security and Strategy, last week, Zhu Min, former deputy-managing director of the International Monetary Fund and former vice-president of the People's Bank of China, shared his insights on the future of China's economy.

Q1: Faced with slower global growth and trade, how can China, a country traditionally reliant on trade, create new engines of growth?

A1: China is now focusing on three new growth engines to ensure continued economic progress. The first is increased domestic consumption:

China aims to boost domestic consumption, which currently accounts for only 48 percent of GDP, compared with 81 percent in the United States. This shift is crucial, as China can no longer rely on infrastructure investment or exports for growth. The key steps in this context include accelerating income growth, strengthening social security systems (for example, pensions and healthcare), and increasing the supply of goods and services, particularly in the less-developed services sectors.

As per capita income rises, demand for services such as healthcare and education will grow. Services like entertainment, sports and tourism will also become more prominent. By aiming for a 1 percent increase in consumption's share of GDP each year, China seeks to raise it to 58 percent over the next decade, supporting sustainable domestic demand.

The second is by transforming manufacturing. China's manufacturing sector, which accounts for 30.3 percent of global production, is shifting toward high-value, digitalized industries. Over the past 40 years, China has developed from producing low-cost goods to producing high-quality goods. Now, the goal is to integrate advanced technologies into manufacturing, such as digitalization in industries like solar energy and electric vehicles. China's rapid development in artificial intelligence for manufacturing — especially the country's 224 registered AI models — shows its commitment to digital transformation. As manufacturing becomes more tech-driven, China will aim to maintain its global manufacturing leadership despite the increasing trade challenges.

And the third is by achieving carbon neutrality and green transition. China's pledge to achieve carbon neutrality before 2060 presents both challenges and opportunities. Coal currently makes up 57.7 percent of China's energy consumption. Reducing this reliance is a daunting task. To meet its goal, China must cut carbon emissions by 300 million tons a year.

Unlike Europe, which has reduced its emissions by 100 million tons a year over the past 30 years, China's ambitious target requires faster progress. The key areas of transformation include renewable energy sources like solar and wind energy, which have seen significant cost reductions. Hydrogen energy and nuclear power are also central to the green revolution. China is rapidly developing its nuclear power industry and expanding its carbon emissions trading system (ETS), with plans to extend it to industries such as steel and cement. The new focus on carbon measurement and carbon efficiency as key performance indicators will help steer the economy toward sustainability.

China's transition to these new growth engines will take time, but it aligns with the global trends. While challenges remain, these strategies will lead to the path of sustainable development, ensuring that China adapts to both domestic and global changes. The aim is to replace outdated growth models with ones that foster long-term resilience and green growth.

Q: What else do you think is in the government's toolbox in terms of what it can do and what it is willing to do? For example, there's hukou (household registration) reform.

A: That's right. The number one priority, as I said, is to ensure that income growth is higher than GDP growth. This is the first and most important goal. The second issue is building safety nets, which I think is equally important. We are all getting older, particularly myself, as you can see…. So pensions, healthcare and even kindergarten education need to be expanded and improved. We are planning to extend free education down to the kindergarten level, providing incentives and making it easier for people to have more children.

I believe these are the foundational infrastructure we need. But more importantly, we must focus on the services sector. As I mentioned earlier, the services sector in China is less developed. Of China's total consumption, 48 percent comes from services, which is far too low.

We need to… develop the services sector because … and we need people to consume more services. I believe people will consume more because the supply is here, and that is human nature. When people have more money, they consume. For example, I haven't bought a suit in 10 years because I don't need one. But I continue to spend money on books, education, healthcare, exercise and other things. So demand and supply will naturally drive growth in the service sector. I believe the service sector will become a major industry in China.

We conducted a study looking back 200 years at all advanced economies. What happened as they developed? They moved from agriculture to manufacturing, and then from manufacturing to services. Today, the services sector employs more than 50 percent of the workforce, offers higher salaries, and has become the backbone of the economy.

However, economic growth does slow down during this transition — that's inevitable.

I believe the services sector will pick up in China. But … If we want to expand it, we need to further open up the services sector. International experience shows that if you want to develop your services sector, you must open it up to the world. That is the key.

In some ways, the services sector (as a whole) is not tradable — you cannot move certain services. However, some parts of the services sector are tradable. Both types (of services sector) must welcome international competition to grow and improve. In particular, with the development of the internet, mobile phone and other technologies, the services sector has great growth potential.

I believe the services sector will become a major area for foreign investment, foreign joint ventures, and for Chinese companies alike. Twenty-some years ago, everything was focused on manufacturing. Now, I think the services sector will be the next big thing. Yes, I think that's a good direction.

Q: I'm sure you know the outcomes of some of the trade negotiations, where technology transfer from China was a key issue. This has reversed the trend of technology transfer. Do you think that's a fair deal?

A: Yeah, think back to the 1970s, right? The US launched a trade war against Japan. Japan responded with three strategies: voluntary constraints on export, which is something we might offer to Europe today, reverse technology transfer, which is also something we might offer Europe today, and reverse investments, which we are already offering to Europe today.

I think this approach will become more and more common for Chinese capital around the world. That doesn't mean China is leading in science and technology — we are still behind in many ways. But in manufacturing, there are two key factors.

The first is technology integration, which follows Moore's Law. I always argue that EVs belong to the semiconductor industry. Mercedes-Benz, for example, is a traditional car manufacturer. The company updates its models every 10 years, but EVs need to change every 18 months because they follow Moore's Law. Once you establish a strong position in the EV sector, it becomes much harder for others to catch up because of the data and the continuous innovation process. Which also improves efficiency.

Digital tools allow you to change design in real-time — every second — if needed. In contrast, Mercedes-Benz requires an entire team working year-round to design a new model.

The second factor is global collaboration. I think China will adopt a similar approach to what Japan did. For example, China is already building battery factories in Germany, EV factories in Hungary, and transferring technology to European countries. China is happy to collaborate (with other countries) in such ways, and this trend will continue.

It will be very interesting to see, over the next five years, how much patents China transfers for foreign use and how much China receives in return. These are measurable statistics, and I believe we will see significant changes. This will show how much China's manufacturing sector is transforming. I'm confident of China's manufacturing capability.

Take Budapest for example. In the city, close to each other are a Volkswagen factory and a BYD factory. Both produce almost the same car. However, a BYD car costs 40 percent less than a Volkswagen car.

I visited a company with the chairman of Volkswagen, and he was shocked. This difference is due to a self-reinforcing process. Now, Germany (Volkswagen) has a fully operational assembly line in Budapest, competing directly with BYD.

We have an assembly line (in Beijing), and Volkswagen has one too. I can promise you… you'll be able to tell the difference. That's the reality of the competition we're seeing. It's tough, but it's also exciting.

Q: We've talked about how tariffs might impact China's economy, but how will decoupling and tech export controls affect China's ambition of producing more affordable goods and high-tech products?

A: That's a deep question. It's already happening. Decoupling is a reality. This is a truly fundamental issue. To me, economically, a 60 percent tariff is not a real tariff — it's simply a way to force China to decouple from the United States or to push the US to decouple from China. Because, honestly, you can't do much with a 60 percent tariff, right? So decoupling is the real risk, and I think it's already (proving) effective.

Let me share a very interesting study. We conducted research using Cold War data from 1952 to 1990, the year after the Berlin Wall was torn down. In 1952, we set the trade between the two blocs — the Western and Eastern blocs — at a baseline of 100. During the Cold War, as tensions continued, trade between these two blocs steadily declined. While global trade overall increased, trade between the two blocs declined significantly. By 1990, it had declined by more than 40 percent.

That's decoupling. The Cold War was essentially a process of economic decoupling. But what's even more interesting is that I studied the data from 2017 to 2023, and I was shocked. The trend today follows the exact same curve. This means that trade between the Western world and the East or South is declining, while intrabloc trade — trade within each group — is increasing.

This is the only thing I can say today, empirically, because as an economist, I believe data tell the truth. And this is something we should work hard to avoid.

In today's interconnected world, where we all live in a "global village", I don't see how we can divide the world into two separate blocs. If trade is divided into two blocs, other things will follow; capital flow, for example, has already dropped to almost zero between the US and China. Technology transfer between the two countries is also almost zero today. This will lead to more political issues and more uncertainties. We must work hard to avoid this kind of situation and prevent a return to a Cold War-style divide.

I believe decoupling has two major consequences. First, it reduces efficiency around the world. Second, it creates enormous uncertainty for the global economy. This is not a solution for anyone, for China, for the US or for the rest of the world. This is a very, very difficult question, but we need to work hard to stop this trend. I think that's the most important task.

The views don't necessarily represent those of China Daily. 

If you have a specific expertise, or would like to share your thought about our stories, then send us your writings at opinion@chinadaily.com.cn, and comment@chinadaily.com.cn.

 

 

 

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