China approves establishment of Qingdao West Coast New Area in June, aiming to transform economic structure in the east coastal area

It's a study in contrast. While other countries have uniformly shown concern over China's sluggish economy in the past two years, policymakers in the world's largest developing country have seemed optimistic, even going so far as to term the reduced growth rate "the new normal" for economic trends.

During his recent stay in Henan Province, Chinese President Xi Jinping urged governments at all levels to adapt this "new normal" as the standard for economic growth and to remain cool-minded amid slowdown in the world's second largest economy.

In spite of economic deceleration, the Chinese Government has not resorted to stimulus packages in the past year, implying that the new normal has already permeated the mindset of policymakers. 

Five signs

For Wang Jun, a senior economist from the China Center for International Economic Exchanges (CCIEE), the new normal reflects the fact that China's economy is shifting from high gear to middle gear.

According to statistics from the National Bureau of Statistics, in 2014, China's economy maintained its downward growth trend by registering GDP growth of 7.4 percent in the first quarter, far lower than the average annual growth of 9.3 percent from 2008 to 2012.

Wang predicted that the new normal will become more and more evident in five distinct ways. To begin with, medium growth will become the expected normal. In the future, Wang said China will experience a gearshift with GDP growth floating between 7 to 8 percent, a commonplace occurrence for middle-income countries.

Meanwhile, according to Wang, ongoing economic structural upgrading and adjustment will continue to forge ahead. Consumption and private investment contribute more to social demand and thus they have gradually become a major driver for economic growth. The service industry has also gained momentum amid industrial upgrading. The regional gap is narrowing, and a pattern of coordinated development is taking shape.  

The next phenomenon was that innovation is replacing factors of production and investment as the main engine of economic expansion, said Wang. In the face of challenges arising from the adjustment of the world economy and opportunities emerging from the new round of its technological and industrial revolution, China is trying to focus on the elevation of quality and efficiency, and will allow technological progress and innovation to fuel its economy.

Wang warned that uncertainties will also become increasingly conspicuous on a number of fronts. The traditional manufacturing industry has been plagued by overcapacity, the rapid expansion of local government financing platforms and shadow banking have led to the escalation of credit default risks, a liquidity mismatch is making corporate financing more difficult and expensive, and a long-term mechanism for real estate control badly needs to be put in place. Moreover, it is likely that China's economic growth will continue being subject to the "slings and arrows" of external factors, such as changes of the international economic environment and policies, the ups and downs of the international capital market, the resumption of international trade protectionism, and foreign investment barriers.

Finally, Wang said macro control and innovative thinking will play a larger role. The government will adhere to a mix of proactive and prudent policies with a stress on flexibility and prevision. It will also pay equal attention to stabilizing growth, adjusting the economic structure and minimizing potential risks.

The new normal, Wang said, is not an indication of an economic depression, but a "balancing out" by which the Chinese will attain sustainable growth in the long term. As China's economic reform deepens, he said that people should adjust their expectations and adapt to the new normal, instead of fixating on high-speed growth. In short, it's time for new thinking. 

Don't panic

Zhang Monan, an associate research fellow of the CCIEE, held that the international community should not be unduly alarmed by the apparent downward trend in China's macroeconomy.

It's obvious to anyone that China's economy is indeed slowing down, compared to the double-digit growth registered in the early years of its reform and opening up. However, Zhang pointed out that China's figures are not so alarming. Take India as an example. Its GDP growth stood at 10.1 percent in 2010, but dramatically dropped to 4.9 percent in 2013.

However, the new normal hasn't arisen from superficially comparing China with other economies. Instead, it answers the demands of the much-needed economic structural reform. In any case, the current 7-percent-or-so growth rate is in line with China's current economic status - that of a middle-income country.

The slowdown to some extent can be construed as the growing pains associated with economic restructuring and is in compliance with the economic "laws of physics."

Zhang said China has adjusted its expectations for growth, prepared to enhance its load-bearing capacity for economic slowdown, and devoted more energy and resources to reinforcing reforms and economic restructuring, so that the efficiency of the economy can be greatly improved. 

Future policies

Wang said that economists should not confine their macroeconomic analysis to the three traditional drivers - consumption, investment and export, but seek brand new sources of momentum for long-term development.

Wang suggested more investment be made in the education sector to nurture talent in innovation. After all, promoting employment and raising productivity represent the roots of economic growth.

Aside from that, Wang said that the mixed ownership model should be further expanded, and private enterprises should be encouraged to enter sectors once monopolized by state-owned enterprises. In this way, investment return and the efficiency of resource allocation should also be significantly improved.

Furthermore, more investment is required in science and technology, and more efforts should be made in promoting the application of scientific and technological results, making innovation the new engine for economic growth.

Wang said that government policies in the future should reaffirm the dominant role of enterprises in innovation, strictly safeguard intellectual property rights and take the initiative in incorporating into the global innovation network.

Zhang believed that future economic policies and reform should shift focus from demand management to supply management, encompassing the adjustment of labor force, salaries, prices and output growth. In other words, supply management means increasing the effective supply in the macroeconomy and alleviating the downward pressures and imbalances through technological innovation, the accumulation of human capital and the enhancement of total factor productivity.

In the meantime, an array of market-oriented reforms should be carried out, such as interest rate liberalization, the elimination of price fixing, and adjustment of income distribution.

"Only in this way, can the economy maintain sustainable growth. It represents new thinking with the 'new normal' lying at its foundation," said Zhang.