Regeneration inducers

China’s national rejuvenation requires successful realization of three landmark transformations by mid-century

The quarter century mark of the 21st century is a propitious moment to take stock of the remarkable progress of the Chinese economy.

At the turn of the century, China was a $1.2 trillion economy (measured in current dollars), barely 12 percent of the size of the economy of the United States. Twenty-five years later, as the National Bureau of Statistics’ recent estimates of GDP denote, China’s $20 trillion economy is two-thirds the size of the US economy. And there is still tremendous room for catch-up growth. China’s per capita GDP of $13,300 (in 2024) is just 16 percent of the US’. There is ample pent-up growth awaiting release in the Chinese on-going rural to urban transitions. When a $35,000 per capita GDP spawns an overall $50 trillion economy, the Chinese economy will outrank the US economy by size.

That China is poised to become the world’s largest economy during the second quarter of the 21st century does not mean that it is inevitable. The policy emphasis on “high-standard opening-up” and the integration of “high-quality development” and “national security” indicates a calibrated strategy to fortify China’s economic foundations while navigating the complex external environment. To understand the pathways implied by these strategic directions, we should look at three potential landmark transformations.

First, a successful transition hinges on transforming China’s manufacturing ecosystem from a global production hub to an indispensable innovation partner. The ambition to build a secure, controllable modern industrial system under high-standard openness would be greatly advanced by attracting global R&D functions, leveraging China’s world-class innovative ecosystems to complement its unparalleled manufacturing clusters.

The global market leadership that Chinese enterprises have displayed in the commercialization of green technologies can be replicated in other key industry chain technologies and products.

These include machine tools, medical equipment, integrated circuits, high-end instrumentation, industrial software and advanced materials.

Just as it has been an iron fact for the past 25 years that no major internationally competitive manufacturing company could prosper in the global marketplace without a China onshoring strategy, so it must become an unchallengeable proposition for the next 25 years that the onshoring of R&D functions in China is key to global success.

This requires further rationalization of China’s market access restrictions and alignment of its industrial policy with high-standard international rules, enabling companies to sustain global competitiveness through deep integration into China’s innovation chain.

Second, rebalancing the economy toward a consumption-led model depends fundamentally on accelerating the liberalization of the services sector to boost household income and demand. ​

The share of China’s household consumption as a share of GDP remains 10 percentage points less than comparable upper middle-income economies.

Eleven consecutive quarters of supply-demand imbalances-led deflation has also brought to the fore the difficulty of aggregate demand management in an economy as large and complex as China’s.

A new development paradigm with the domestic cycle as the main body and the domestic and international dual cycles promoting each other requires strength and stability.

For this to be the case, the labor share of national income must rise on the back of improvement of the services sector, given that the vast majority of Chinese workers will be employed in the services sector — rather than in capital-intensive advanced manufacturing — and low productivity growth therein will constrain wages, squeeze consumptive demand and impede rebalancing.

Third, achieving “common prosperity” requires a fiscally sustainable approach that stimulates opportunity while strengthening the social safety net, avoiding the pitfalls of either inadequate protection or welfare-driven imbalances. ​

On the one hand, socioeconomic precarity must not act as a bottleneck for growth. The central government should place an increased share of fiscal resources at the disposal of local governments as well as bear a greater share of social protection-related expenditure on its balance sheet.

The former will enable local governments to plug their structural revenue deficits as well as transition away from the land-based model of finance for urban development which is no longer sustainable.

Performance assessment of local government officials should be tied to criteria such as local income and employment growth and the provision of public services. The latter should align expenditures with fiscal capacity, including taxes with the greatest redistributive impact such as the personal income tax and the capital gains tax, while reducing households’ propensity for excess savings.

On the other hand, entrepreneurialism and wealth creation, not egalitarianism or welfarism, must remain the engine of China’s pursuit of “common prosperity”. Transfer payments should not disincentivize work nor saddle government balance sheets excessively. It is instructive that the country is still reckoning with the ill-effects of the excess investment boom of the post-Global Financial Crisis era. It should avoid replicating a similar unraveling on the consumption side, fueled by unsustainable transfer payments-related expenditures.

The international economic system stands at a moment of great flux, buffeted by the furies of protectionism, populism and economic nationalism. The successful realization of the three landmark transformations by mid-century will ensure that China not only stands head-and-shoulders above its economic peers but that it can serve as a beacon of hope in the international system, underwriting its growth, prosperity and stability.

The author is a senior fellow at the Institute for China-America Studies in Washington DC.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.