Over the last thirty years, perhaps the most significant capital that the Chinese Government has accrued is not the trillions of foreign reserves in its central bank, or the value of fixed assets so much investment has gone into. The most important capital it has is in the form of reputational capital with the public gained through the continuously good level of GDP growth since 1980. Like a saver putting money in the bank, over all this period the Chinese government has been converting GDP into public confidence and saving that.
It had to do this, because economists and planners knew that one day the stellar GDP figures would diminish. It goes against the laws of sustainable development that, as Premier Li said in his March 5 Government Work Report, you can't continue to use resources and invest as heavily as you once did. Things have to change. New spaces for growth have to be found. The challenges of a developing economy are very different from a partially developed or developed one. That's just the way things are.
The new normal in China, therefore, where growth is "approximately 7 percent," is, according to this year's National People's Congress (NPC) session, one where the battleground shifts from raw GDP to better productivity, better quality growth, employment, and entrepreneurialism. This is a hybrid list, and can only work in an environment where, as Premier Li made clear, there are clear rules so everyone knows how to work together, but also a looser government role, more energy from the non-state and entrepreneurial sector, and more appetite for controlled risk.
The regulatory framework is the key thing, and something the NPC spent some time discussing. In the recent past, risk was controlled mostly by the central government. There were clear prohibitions against people taking too many chances, with strong controls through the fiscal and administrative system. But now China needs to embrace an era of innovation and adventure. In order to achieve this, powers need to be devolved more down to local governments. Rules need to be clearer, simpler and easier to implement. Everyone needs to have a clear idea of what the responsibilities and powers of other parties are. Once that is in place, then people can start to invent, devise, propose new ideas and approaches. In theory, that is how a creative society should work.
The NPC this year can partly act as a process of devising a new, clearer role for government. Markets, which are well regulated, need to increasingly set the prices for factors of production. Consumers need to replace fixed asset investment as the key driver of economic growth. And the service sector will rise, replacing manufacturing where prices are low and input costs rising, so that the urban, modernizing economy comes more quickly into existence. The government has to be the servant in all of this, withdrawing from some areas, but making sure before it does so that there are clear rules and regulations, and the system in place to implement these.
One of the tactically most important shifts we can see in this "new normal" paradigm outlined at this year's NPC is greater investment and shifting effort into human capital. Education and healthcare get special attention, as does improving China's environment. These are all critical for human development. They are also increasingly producers in their own right of better quality GDP.
Education will see 7.5 million new graduates in 2015. That will make up three quarters of the figure of new jobs that Premier Li promised would be created this year. In a short space of time, therefore, China is seeking to have one of the best educated young work forces in the world. Environmental protection means better technology, more investment in research, and more clean industry.
Healthcare too, with its extension to community centers available to 95 percent of the population, is also going to take up an increasing part of growth. As Premier Li stated some years before healthcare and social care are important contributors to GDP in their own right. But they obviously contribute to much more than just that.
The "new normal" in effect boils down to a "new economy." But the immediate issue is that, with the expectations of the public rising by the year and their demands becoming more complex, there is a big challenge in navigating from the era when it was just about growth based on physical assets and productivity alone, to the one where it is about quality based on humans. This is why the "political capital" that the government has put in the bank over the last few years, referred to in the opening paragraph, is so important. This is the investment that China's government now needs to draw on as it undertakes a difficult period of reform where a major Chinese paradigm shift is happening.
The author is the executive director of China Studies Centre, and professor of Chinese politics, University of Sydney