What does ‘high-quality growth’ for China mean?

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What does ‘high-quality growth’ for China mean?

Published: 28 Jul. 2024, 19:58 Updated: 28 Jul. 2024, 21:52

Ha Hyun-ock
The author is an editorial writer of the JoongAng Ilbo.

China has embarked on a bold crusade to change its decades-old economic development model. In the third plenary session of the 20th Central Committee of the Communist Party of China (CPC) two weeks ago, the Chinese government declared “high-quality development” as the top priority in achieving its “Chinese-style modernization.” The government also presented the timetable in detail — finishing the reform tasks adopted by the third plenum by 2029 and building an advanced socialist market economy by 2035 through qualitative growth.

The rest of the world paid close attention to the third plenary session of the CPC because it’s the venue for Beijing to present its mid- to long-term road map to develop the Chinese economy. The Central Committee — a core apparatus of the CPC — decides major policies of the party and the government while the National People’s Congress, which is held every five years, is in recess.

The third plenum is convened seven times for five years until the next People’s Congress is opened. In the first plenum, a new CPC leadership is formed; in the second plenum, people responsible for the operation of the government are appointed; and in the third plenum, the government’s policy direction, including on the economy, is determined to help innovate national governance.

It was in the third plenum of the 11th Central Committee in 1978 that Deng Xiaoping proclaimed a drastic shift to reform and opening, offering a historic inflection point for China’s rise to G2. The “high-quality development” model in tandem with the socialist market economy first appeared in the 19th National People’s Congress in 2017 with the start of President Xi Jinping’s second term.

But the concept of the development appears blurry. It encompasses building an economic structure led by cutting-edge industries, but still lacks details. Apparently, however, China wants to ratchet up productivity through sophisticated technologies. The market interprets the new development paradigm as the government’s intention to accommodate slow-yet-steady growth and achieve technological self-reliance by advacing the hi-tech sector.

The growth paradigm shift was designed to avoid the middle-income trap. The Chinese economy is undergoing a structural transition from high-speed growth to medium-speed growth, as represented by the plunge of its annual growth rate of more than 10 percent to the four to five percent range. The development model based on cheap labor already reached its limits. To tackle the deepening Sino-U.S. trade conflict, global protectionism and frequent supply chain disruptions, the Chinese government decided to prioritize qualitative growth over quantitative growth.

The “high-quality development” model was intended to avert a trade war with the United States and its technology blockade. America is intensifying its checks on China by putting the country’s chipmakers on the blacklist of export restrictions and even pressuring its allies to refrain from deploying sophisticated chip equipment at their factories there. China is also highly reliant on foreign countries for core technologies for its chip production.

If former U.S. President Donald Trump is reelected in November, the United States will certainly strengthen its offensives against China. Bloomberg linked the “high-quality development” strategy to the need for China to build a high technology-based economy to defend against U.S. trade restrictions.

China also turns to domestic challenges to help facilitate the transition to “high-quality growth” after its real estate market slump and local governments’ massive debts slowed the economy and deepened worries about a recession. China’s GDP growth rate in the second quarter — which was announced just a day before the third plenum of the Central Committee on July 16 — fell to 4.7 percent, way below the market expectations of 5.1 percent.

That shows a minimal effect of government subsidies for replacing cars and home appliances on stimulating the economy — and suggests the futility of the Chinese version of the corporate “value-up program” in energizing the stock market. That’s why participants in the National People’s Congress and the People’s Political Consultation Meeting in March anticipated this year’s growth target of 5 percent to be unattainable.

The economy could get worse in the second half due to the weak domestic demand from slower growth and regional governments’ snowballing debts. The International Monetary Fund estimated their liabilities to reach 101 trillion yuan ($13.9 trillion) as of the end of last year — more specifically, 40.7 trillion yuan in official debt and the remaining hidden debt from local government financing vehicles (LGFVs).

China’s engine for “high-quality growth” under such dire circumstances is what Xi called “new quality productive forces” in a meeting last September. In that meeting in Harbin, he first expounded on “dramatically lifting productivity based on high technology” rather than “achieving growth by just pumping in a huge amount of resources, including manpower, as in the past.” The Chinese government will make massive investments to acquire cutting-edge technologies and industries, including chips and AI.

According to Korea Investment & Securities, the industrial production growth rate for China’s high-tech sector increased by 8.7 percent in the first half — compared to 6 percent for the overall industry — after the government spurred investment in cutting-edge technologies by 10.1 percent. If the trend continues, the share of high-tech industries in the Chinese economy is expected to surge. Bloomberg predicted that the share will soar to 23 percent of the GDP in 2026 from 11 percent in 2018. During the same period, the share of the property market — a key driver of China’s growth in the past — is expected to dwindle to 16 percent from 24 percent.

The Chinese government is accelerating efforts to secure top-caliber manpower to help realize the “high-quality development.” The South China Morning Post reported about Beijing’s plan to introduce a green card system to offer foreign scientists various types of benefits, including granting permanent residency, to encourage them to contribute to the “high-quality growth.” A securities expert attributed the move to the need for China to find new breakthroughs to propel its growth rather than resorting to its traditional fixes — boosting domestic consumption and the property market.

Could the government really keep up with the “high-quality growth” strategy down the road? A highly concentrated injection of limited resources into fostering a high-tech industry runs the risk of slowing the economy, given the absence of stimuli programs, which can deepen China’s recession particularly when the economy goes down. Investors’ disappointment about a critical lack of stimuli measures for consumption and the property market forced the Chinese stock market to continue to plunge.

The People’s Bank of China — the country’s central bank — even lowered the benchmark loan prime rate (LPR) by 0.1 percentage points last week to 3.85 percent for the five-year LPR and to 3.35 percent for the one-year LPR. Market watchers interpreted the measure as Beijing’s will to stimulate the economy despite its limited impact. In its July 22 report, Bloomberg Economics described the combination of policy and rate announcements as a “little bang.”

China’s pursuit of “high-quality growth” based on developing cutting-edge industries will certainly intensify the U.S.-China conflict even further. That will surely affect Korea. “There’ a possibility that the United States and China will be headed to an even fiercer competition over high-tech products like chips and electric vehicles,” the Korea Center for International Finance warned. “We must prepare for inevitable damage from Trump’s hard-line anti-China policy, including high tariffs, in case he reenters the White House in November.”