Driving the ‘new normal’: stability, urbanisation and innovation

Gu Shengzu, vice-chairman of the Financial and Economic Affairs Committee of the Twelfth National People’s Congress, writes about the major elements that will drive China's economy
Connection is part of ongoing growth in China

China's ‘new normal' economic period will involve three important factors: stable and solid growth; new forms of urbanisation; and industrial upgrading. The first issue is related to stabilising the country's growth rate at levels lower than those witnessed in the past. The average annual growth rate during the past 30 years was around 9.8%, while in the new normal period growth should enter the ‘7% era'. Addressing downward pressure on the economy and stabilising growth is dependent on transforming the engine of the economy.

New urbanisation

Part of this will rely on the creation of a new engine for regional economic development. Chinese premier Li Keqiang pointed out two focuses of regional economic growth in the Government Work Report in 2014. First, the construction of the Yangtze River Economic Belt, relying on the ‘golden waterway' and development of the urban agglomerations in the Yangtze River Delta, Pearl River Delta and the Beijing-Tianjin-Hebei region, to improve industry logistics. Second, the planning and construction of the Silk Road Economic Belt, with respect to international economic and technical co-operation.

Therefore, the blueprint of regional economic development in China has developed from the basis of the coastal economic zones over the past 30 years to the Yangtze River Economic Belt and the Silk Road Economic Belt in 2014. The coastal economic zone involves 12 provinces, the Yangtze River Economic Belt involves 11 provinces, while the Silk Road Economic Belt covers more than 40 countries and a population of 3 billion.

President Xi Jinping proposed five key aspects about the construction of the Silk Road Economic Belt: political communication; road connectivity; unimpeded trade; monetary accommodation; and personal communication. The key factor for the Silk Road Economic Belt is ‘connection'.

To achieve this, China needs to construct multiple physical channels, including overground railways and highways, underground oil and gas pipelines, and develop the interregional economy of the Silk Road. The Silk Road Economic Belt, targeting the development of energy, is an open and co-operative economic zone as well as an important strategy for the development of western China.

The Yangtze River Economic Belt involves 11 provinces, which account for approximately half the country's GDP. The development of the urban agglomeration of the Beijing-Tianjin-Hebei area is also important in the regional economic development of China, which places environmental protection and transportation construction as a priority, including overcoming industrial logistical challenges.

From the point of view of driving the national economy, the urbanisation process will create huge demand for investment and consumption.

At present, there are six large urban agglomerations in the world, represented by New York, Chicago, Tokyo, Paris, London and Shanghai - the last of which covers the Yangtze River Delta. The key to the construction of an urban agglomeration is that of the central city. The Yangtze River Economic Belt covers eastern, western and central China. Three urban agglomerations in the Yangtze River Delta, the middle reaches of the Yangtze River and Chengdu-Chongqing area connect the entire region of the Yangtze River.

The lower reaches of the Yangtze River Delta, as mentioned, is already one of the six largest urban agglomerations in the world, while the middle reaches area is striving to become the fourth big urban agglomeration in China after the Yangtze River Delta, Pearl River Delta and the Beijing-Tianjin-Hebei region - leading the rise of central China. Relying on the ‘golden waterway', the urban agglomeration in the middle reaches of the Yangtze River has an obvious advantage in water carriage, as the shipping cost is only one-sixth, one-twenty-eighth and one-seventy-eighth of the cost by railway, truck and air respectively, and therefore has huge potential for development.

The urban agglomeration in the upper reaches of the Yangtze River is in the Chengdu-Chongqing region, which is at the centre of western China. This urban agglomeration is an important base that links the Silk Road Economic Belt and the Yangtze River Economic Belt.

The urban agglomeration of Beijing, Tianjin and Hebei is centred on Beijing, the capital city. President Xi investigated Beijing's smog problem and proposed the pressing need for city reorganisation. He held a conference focusing on the collaborative development of the Beijing area and said the main cause of smog is automobile exhaust fumes, which is closely related to urbanisation.

The population of Beijing has exceeded 20 million and car ownership has almost reached 6 million. Organising industrial development and managing the city's population are currently high-priority tasks. Beijing once proposed limiting the population to 18 million by 2020, but it had already exceeded this 10 years before the target date. The population problem has become the primary issue. To solve this problem, we must rely on Hebei to expand its industry, in order to realise the goal of dispersing the population.

The development of new urbanisation, particularly as characterised by urban agglomeration as the main platform, will play an essential role in the stabilisation of growth because urbanisation is a process transforming farmers into city dwellers, constantly increasing consumption levels and driving huge demand for investment.

Industrial innovation

There is also a need to promote industrial improvement in regional economic development through innovation. So how we can realise innovation-driven development? In this case, institutional innovation is more important than technological innovation - and the most important institutional innovation is that in the financial arena. In addition, talent and technology are key elements to achieve innovation. China needs to create a social environment that encourages the development of business and innovation, as the current social environment does not match the demands of innovation, and the country is experiencing huge economic risks from the hollowing-out of the real economy. The software from an innovative entrepreneurship culture outweighs the hardware equipment in factories.

Regarding the strategy of how to realise development driven by innovation, my opinions are as follows:

  • Create an environment in which people can acquire wealth through the development of industry and innovation so that the basis of the real economy can be strengthened. At present, China has entered the ‘high-cost era' with the risk of damaging the real economy. If factories vanish, then innovation cannot be conducted any more.
  • Revive the spirit of entrepreneurship, which is driven by innovation. Propelled by the government's decentralisation reforms, there is a new wave of entrepreneurship in China relying on the internet as a platform.
  • Cultivate an innovative entrepreneurship culture that tolerates failure and encourages risk-taking as well as inclusiveness. Telecommunications firm Huawei is an example of going global through institutional innovation. Its employees hold 98.6% of Huawei's stock, while the chairman of the board, Ren Zhengfei, holds merely 1.4%. The company's success could be attributed to such an innovative equity structure.
  • Promote co-operation and innovation within the economy to construct innovative alliances and cast off any insularity related to innovation. Within a technological monopoly, the aerospace industry has been forced to innovate independently. From the atomic bomb to manned space projects, China has achieved innovation because of a technological monopoly. The Three Gorges Reservoir project is also an example of an innovative domestic co-operation process, while the reliance of the development of the automobile industry on foreign technology is a counterexample.
  • Innovation should be both technical and financial. Even though there are many problems in the US financial system, its finance and technology industries offer development lessons that are worth learning. The late UK prime minister Margaret Thatcher argued that the reason the country's high-tech industry lagged behind that of the US was due to risk investment. The development of finance and technology is important for driving innovation.

Regional economic development under the new normal needs a new engine - namely, new urbanisation, especially the planning and construction of urban agglomeration. To achieve industrial improvements, a new incentive is needed that is driven by innovation.

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