Friday, Jul 28, 2017, 8:45 PM CST – China


China needs to undergo ‘creative destruction’ to inject new energy into its economy

China must seriously reform its current governance and create a market-oriented economic ecosystem that rewards innovation

During the recent Fifth Plenary Session of the Communist Party of China Central Committee, China’s central leadership unveiled the blueprint for its 13th Five-year Plan. Among the 10 goals outlined, maintaining economic growth was listed as a top priority.

Against the backdrop of a continuing economic slowdown, Chinese Premier Li Keqiang called for seeking “new energy” and “new momentum” to spur economic growth. But to create and promote this much-desired new energy, China needs to go through what economists call “creative destruction” to address various problems that have resulted from its current governance system.

With strategies such as “Internet Plus” and “Made in China 2025,” the Chinese leadership has been endeavoring to promote the role of innovation and technological development in the economy in the past year. In the third quarter, the service sector made up 51.4 percent of GDP, two percentage points higher than in the second quarter.

Although this increase is often interpreted as progress in terms of moving from an investment-driven model of growth to a consumption-driven model, it can also be seen as an indication of the continuing decline of China’s manufacturing industry. As many businesses in labor- and energy-intensive, low-efficiency and often high-polluting industries are driven out of the market, it appears that there are not enough “new energy,” innovation-intensive enterprises to fill the gap.

This problem remains a focal point for the Chinese government. But in order to unleash new momentum, China must seriously reform its current governance and create a market-oriented economic ecosystem that rewards innovation.

To achieve such a goal, the government needs to reform its current governance system at a fundamental level in order to promote the rule of law and prevent excessive intervention. Such reform will need to include changes in many arenas; liberating the financial market, addressing the monopoly status enjoyed by State-owned enterprises and genuine legal reforms are all necessary revisions.

In recent months, the Chinese government has launched various reforms, including freeing up the interest rate, promoting public-private partnerships in infrastructure construction and public utility projects, and cutting government power by scrapping or relaxing a third of administrative approvals.

But to create enough new energy and inject enough momentum to sustain China’s economic growth, the Chinese government will need to show a strong political resolve which the Chinese premier likened to a courage to “cut ones’ own wrist.”


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