Jan 16, 2018 01:28 PM

Opinion: ‘High-Quality Development’ Becomes Benchmark of China’s Progress

At the 19th National Congress of the Communist Party of China, for the first time, President Xi Jinping pointed out that “China’s economy has been transitioning from a phase of rapid growth to a stage of high-quality development,” adding that “We must put quality first and give priority to performance” and “We should work hard for better-quality, higher-efficiency, and more-robust drivers of economic growth through reform.”

The term “high-quality development” can be understood and interpreted in two ways. The first is to regard it as a judgment, and the second as a goal. Two different interpretations will show us distinct policy orientations.

High-quality development is a fair judgment about the current development phase, given the transition of the economic growth engine and the optimization of the industrial structure. In fact, since 2015, the growth engine has been shifting from investment to consumption, and the industrial structure from manufacturing to services. In the third quarter of 2017, the share of investment in gross domestic product (GDP) was only 32.8%, while consumption contributed up to 64.5%, almost twice that of investment. Meanwhile, the tertiary industry contributed 57.8% of GDP, with the secondary industry was only 37.2%. These statistics indicate that China is undergoing a relatively smooth transition in terms of economic structures.

Given the case, we can conclude that high-quality development is a result of economic transition and an appropriate description for the status quo. Therefore, high-quality development, as a judgment of the current development phase, fundamentally differs from the supply-side structural reform that was set as a government policy objective.

When high-quality development is understood from the angles of economic efficiency and innovation capability, it should be perceived as an objective. This means mass efforts are required from government to pursue relevant reform. To gain a clearer picture of our goal, we used a few measures and selected as our benchmarks several developed countries, including the United States, Japan, Canada, Germany, France and Australia, and some developing countries, such as South Africa, India, Indonesia, Malaysia, Russia, Brazil, Argentina, Turkey and Egypt. Most statistics are based on the year 2015, and the data source is the World Bank.

On the positive side, China’s pace in scientific and technological (S&T) innovation is faster than our peer countries at a considerable development level. Some indicators are almost on a par with those of developed countries. For example, China’s R&D expenditure as a share of GDP has been climbing in recent years and reached 2.07% in 2015, which was nearly twice that of emerging economies on average and almost on the level of developed countries, at 2.58%. China also exported more high-tech products. High-technology exports accounted for 17.8% in developed countries and 12% in emerging economies, while China made it to around 25%. Outstanding progress was made in the number of Patent Cooperation Treaty patent filings as well. This indicator has demonstrated exponential rising trend in recent years and hit a striking number of 43,168 in 2016, second only to the 56,595 patent filings from the U.S. and 45,239 from Japan. With continuous improvement of S&T strength, China is expected to rank among the leading countries in S&T innovation.

On the flip side, when measured by energy consumption, environment, infrastructure, wealth inequality, government efficiency and tax burden, China did not perform as well as its economic strength. There is still a large gap to be closed to catch up with developed countries.

To evaluate performance in energy consumption and environment, we selected several indicators of concern to the public. The mean annual exposure of PM2.5 pollution in China reached a striking 58 micrograms per cubic meter, compared with an average of 10.2 micrograms in developed countries and 37.6 in emerging economies. The unsatisfactory air quality was mostly caused by low efficiency in energy consumption and an irrational energy structure. China consumed the energy equivalent of 175 kilograms (385.8 pounds) of fossil fuel for each $1,000 of GDP, compared with 127.2 kilograms for emerging economies and 119.6 kilograms for developed countries. As developed countries have smaller manufacturing sectors, China may improve energy consumption efficiency while accelerating industrial structural transformation. Besides, 87% of energy in China is from fossil fuels, with developed countries and emerging economies being 78% and 83% respectively. Clean energy is another way out.

As for infrastructure, wide gaps still exist between China and developed countries in high-speed internet access and transportation capacity. In 2015, around 20 out of every 100 Chinese inhabitants owned fixed broadband, which is far from competitive, compared to the average level of 34 out of 100 in developed countries. China also has a less-dense railway network than developed countries. Measured by length per capita, China is 3.51 kilometers (2.18 miles) per 10,000 people, and the average level of developed countries is 6.36 kilometers per 10,000 people. By length per unit of land, the number of China is 212.64 kilometer per square kilometer (51.02 miles per square mile) while developed countries is 454.23 kilometers per square kilometer. These facts demonstrate that rather than overbuilding infrastructure, China has relatively large room for improvement in the transportation capacity.

Regarding wealth disparity, the Gini coefficient, which measures wealth inequality, is used as core indicator, with source support from the Credit Suisse Global Wealth Report. As is disclosed, wealth inequality has been rising quickly as the Gini coefficient keeps climbing. The Gini coefficient of China was 81.9 in 2015, in comparison with 73.6 of developed countries. (A Gini coefficient of zero represents complete equality, while 100 is complete inequality.) This is in accordance with the latest research results published by Thomas Piketty, a French economist whose work focuses on wealth and income inequality. Serious attention should be paid to the wealth gap problem.

Last but not least, we tried to evaluate government efficiency and the tax burden. According to the World Bank, it takes Chinese companies an average of 261 hours to prepare and pay taxes, compared with 161 hours in developed countries. However, China is already at a leading position relative to 485 hours spent on this task in emerging economies. Establishing a new business in China requires nine procedures, slightly less than 9.2 in emerging economies, but it lags far behind the average level for developed countries, which is only 5.7. In taxation, the total tax rate (percentage of commercial profits) measures the overall tax burden imposed by all levels of government. In 2015, China taxed 67.9% of corporate profits, compared to 45.6% in developed countries and an average of 56% in emerging economies. The Chinese government can reduce the burden of commercial activities and stimulate the vitality of enterprises by further streamlining administration, decentralizing power and lowering the tax burden.

To sum up, China is rapidly approaching the level of developed countries in terms of technological innovation. However, there are also some obvious gaps in some indicators that reflect economic quality. In the future, the Chinese government should work hard to promote efficient energy use and clean energy, eliminate backward thermal power capacity, impose better environmental quality, improve infrastructure and enhance transportation capability. In the meantime, it should also attach more importance to implementing social fairness, reducing wealth inequality, lowering the tax burden and increasing government efficiency. Only in this way can China's economy steadily move toward high-quality development.

He Fan is a professor of economics at the HSBC Business School, Peking University, and director of the Research Institute of Maritime Silk Road (RIMS). Zhu He is a postdoctoral research fellow at HSBC Business School, Peking University. Wen Shiyun is a research assistant at the RIMS.

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