China’s economic expansion over the past 40 years has been spectacular, but continued double-digit GDP growth is not sustainable for any economy. With growth slowing, the country has been shifting towards a more innovation- and technology-driven development model, building on the strong foundations laid over the past four decades.

In this interview Bin Zhao, senior economist at PwC China, discusses China’s strong economic foundations and their benefits for future growth, the different stages of the country’s economic growth leading to this point and proposals for more measured policy changes.

Q. How would you describe the state of China’s economy today and how does this differ from 10 or 15 years ago?

A. Overall, the past 10-15 years have been an important period in which China’s economy has been gradually moving towards higher quality development. In the run up to the recent 20th National Congress, many central government agencies produced a series of summaries of “the last 10 years in China,” from which I feel there are three main conclusions that can be drawn.

First, although the rate of GDP growth has declined from its previous double-digit highs, there is now a good foundation for strong future economic development, a requirement for long-term prosperity. Compared with the developed economies in Europe and the United States, the time China has devoted to developing a market economy has been very short and there have been many lessons to learn, and quickly. For example, China’s initial development was brash and environmentally destructive, but in the past decade we have gradually undertaken more benign, sustainable and green development.

Secondly, the past 10 years have been a period when China’s economy has shifted from only developing hardware, to developing both software and hardware. Hardware includes infrastructure, real estate and manufacturing, while software includes business environment, science and technology and consumer-oriented and business-oriented services. China’s economy is also experiencing a shift from being driven by exports and investment to being driven more by consumption and the service sector. But there is still a high proportion of industrial and manufacturing sectors and a lot of room for the tertiary and service sectors to continue to develop.

Thirdly, the beginnings of a technologically innovative economy are gradually emerging in China. On the one hand, due to the imperfection and incompleteness of the market economy, productivity is low in many sectors in China, especially those with a high proportion of state-owned enterprises (SOEs) and those with more stringent regulatory policies, such as petrochemicals, aviation, the financial sector and especially the banking sector.

On the other hand, some fully competitive industries and sectors, such as e-commerce, new energy vehicles and online social networking, have become globally competitive and in certain areas have reached a world-leading level of development due to the active presence of private and foreign enterprises. The logic is clear: industries and sectors with sufficient reform and a high degree of marketization are developing fast. Industries and sectors that are slow to reform and have been monopolized or dominated by the state economy for a long time, or are strictly regulated, have been less efficient. There are of course a few exceptions, such as China’s high-speed rail, nuclear power, infrastructure construction contracting and aerospace, which are also dominated by SOEs but are still among the world’s leaders.

For China to become a developed economy by 2035, building a science and technology innovation-driven economy is the only way forward. Therefore, it is necessary to continue to deepen reforms and improve the market economy system.

Q. To what extent can China’s economic transition over this period be categorized into different stages?

A. There are several landmark events in China’s economic development, for example, the first was the accession to the WTO at the end of 2001, after which China was rapidly integrated into the world. The country’s imports and exports grew significantly, thus allowing China to develop into the “world’s factory” and the number one country in global trade.

The second landmark event, the marketization or commoditization of the real estate market, is rather vague in terms of time. But the rapid development of real estate post-2000, led to urbanization and promoted a number of areas such as infrastructure.

The third event was the 18th National Congress held at the end of 2012, which sought to put an end to growing environmental pollution, frequent worsening of hazy weather, serious corruption and prominent social conflicts, such as the tainted milk powder incident in 2008. Had it not been for many policy shifts and adjustments after the 18th National Congress, China ran the risk of falling into the middle-income trap and the potential Latin Americanization of China.

The fourth landmark event was the focus on improving the business environment from 2013 onwards. The most obvious difference between developed and developing economies is overall economic maturity on the one hand, and the infrastructure and business environment on the other. As the business environment is invisible and intangible, it is more difficult to improve, but the impact is significant.

The fifth is the supply-side reforms that started in 2015, and the deleveraging and de-stocking that came with it.

Q. To what degree are there issues with the transparency, reliability and availability of data in China?

A. Economic research in China, as with many developed economies, often faces a shortage of data, but the situation may be slightly worse in China, which is after all still a developing country. Due to the rapid development of China’s internet-based digital economy, there has been a gradual diversification of data in China, as well as a significant increase in reliability and transparency.

In addition, the traditional Chinese culture of “reporting the good news but not the bad” is still the case today in the statistics sector, so when providing data, officials often tend to publish good news. Of course, this is also true of many governments, but we tend to have less tolerance for critical voices, pessimistic analyses and forecasts, early warnings of crises, etc.

Q. To what extent are China’s economic problems the result of fundamental systemic issues?

A. Some policy changes in the last year or two have been too abrupt and have not left enough buffer time for businesses and other stakeholders to make adjustments. There should be a clearer process for the study, formulation or revision, release and implementation of major policies, and more stakeholders should be involved in discussing policy creation, with some policies perhaps even requiring public debate between multiple parties. An example is the banning of extra-curricular education and training. If we had consulted parents and the relevant businesses during the period of revising the regulations, and given a 1-2 year transition period for the regulations to kick in, there would not have been a large number of educational institutions closing down so suddenly, with many parents losing tens of thousands of yuan in advance payments. This is a result of China’s institutional shortcomings, and these areas are in dire need of improvement.

From the central to the local level, we are actively improving the business environment, but the formulation and implementation of major policies is also one of the most important aspects of the business environment. If policies are changed overnight, the overall business environment will be hampered, even if we do well in other areas.

Q. What do you see as the prospect of supply chains shifting away from China, and to what extent can they actually shift?

A. There are several reasons for this phenomenon. Firstly, this is the result of the gradual increase in China’s level of development. In the early days of reform and opening up, the vast majority of China’s industrial chains were at the lowest end of the global division of labor, and after more than 40 years of development, many industries have begun to move gradually to the middle, or even higher levels. Secondly, rising costs in China, including the costs of labor, land and environmental pollution, are all on the rise. Thirdly, there are concerns about geopolitics, including the relationship between China and the United States, and that some industries that are highly dependent on the Chinese market may need to be dispersed to other countries.

But overall, I am not worried about this as much as I am about the continued decoupling of China and the United States in several areas.

Q. The US and China have recently reached a deal with regard to the auditing of listed companies in the US. What are your thoughts on the potential success of the deal and the implications for those listed companies?

A. China’s capital markets are still developing slowly, so I think it is in the interests of China and the United States as a whole, and not just Chinese companies, to go public and raise capital in the United States.

From the US point of view, decoupling from China in the financial sector would be a huge loss, as the US profits far more than China from financial sector cooperation. The US economy is highly dependent on the financial sector, which is currently overstretched, and, given China’s likely ascent to the number one global economy, without China’s involvement it may well be at risk of collapse.

Q. Some economists talk about the need to transfer a significant portion of assets and responsibility from the state to individuals. To what extent do you agree with this statement?

A. This is difficult to implement. Some scholars believe that China, over the last 40 years, has been “a rich country with a poor population,” but the situation has improved a little in recent years, especially with the increase in real estate prices. The goal for China’s future development should be “a strong country and a rich people,” however, in the three years of the pandemic, the government’s revenue has fallen to a degree that it will be difficult to give tax cuts to the middle and upper income groups.

Policy changes should make it relatively easy to increase wealth for farmers. Chinese farmers basically have homesteads and land on which to grow food. Although they do not have property rights to their homesteads or houses, if they can determine the number of years of use and increase their levels of trade, we can see a significant increase in the wealth and assets of farmers.

Also, SOEs could consider allowing employees to hold part of the shares, which can increase the wealth of those individuals while potentially improving the productivity of the SOEs themselves.

Q. What are the prospects for China’s economy over the next five or 10 years?

A. China’s aim by 2035 is to reach a dispersed level of economic development that means the entire country is at the current level of major cities such as Shanghai, Beijing, Guangzhou and Shenzhen. In order for this to come to fruition we will need to see a continued rise and development of Chinese companies as global industry leaders, as we already see in the way that BYD and CATL are prospering.

China will also need to see a continued enhancement of national security policy alongside a significant development in the level of scientific research, a more market-oriented economic system and a business environment on a par with that of developed countries, leading to a fully fledged technological and innovative economy.

The rise of China has in many ways relied on learning from the West, and this will continue to be true, while at the same time the West can now learn some things from China. A developed China will be a boon for the world as a whole, and the country’s expertise in things like poverty alleviation will help improve the living standards of people in developing nations around the world.

Interview by Patrick Body