In terms of capital input, China’s economy was a planned economy before 1980.
by Huang Qi Fan
New quality productivity is not simply ordinary economic growth, but rather a leap forward that transcends the traditional path of productivity development. It is the crucial material and technological foundation for achieving Chinese-style modernization.
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| Staff members operate at a workshop in a technology equipment company in Ganzhou, east China's Jiangxi Province, Feb. 13, 2023. (Photo by Hu Jiangtao/Xinhua) |
Theoretically, economic growth and productivity development in a country are essentially a process of gradual accumulation of economic surplus. There are generally four pathways:
Continuous Factor Input: This involves increasing capital investment, labor force, and natural resource utilization to generate surplus and accumulation.
International Economic Cooperation: This includes achieving net exports or attracting foreign investment through international trade to stimulate economic growth.
External Force: This involves seizing resources and wealth from other countries through military conquest or colonization.
Technological Advancement and Optimization: This involves improving total factor productivity through technological progress and optimized resource allocation, thereby driving economic growth.
The first pathway historically propelled economic development in many parts of the world, but also led to resource depletion, environmental damage, and inequality. China’s past economic growth largely benefited from this factor-driven growth model. However, in recent years, as the prices of factors such as capital, land, and labor have continued to rise, its comparative advantage has become less pronounced. Moreover, the long-standing growth model primarily driven by investment in real estate, infrastructure, and debt has become increasingly unsustainable.
In 1980, China had a population of 1 billion people and a per capita GDP of $200, making it a country with a total GDP of roughly $200 billion, accounting for only 1% of global GDP, equivalent to the economic scale of a small European country like the Netherlands. After 40 years of reform and opening up, GDP reached $18 trillion in 2020, a 90-fold increase compared to 1980. For China, during this great 40-year journey, through large-scale infrastructure construction, industrial investment, urban real estate development, and economic development in various other aspects, China has become the world’s second-largest economy. This is undoubtedly a significant historical leap and a remarkable achievement that has attracted global attention.
This development benefited from three major dividends. First, China had a population of 1 billion, providing a comparative advantage in low-cost labor, known as the demographic dividend. Second, China’s fundamental institutional supply during its reform and opening up created a reform dividend. Third, China’s integration into globalization brought a globalization dividend. These three dividends propelled China’s rapid and accelerated development. On the other hand, from the perspective of input of production factors, this is also the result of China’s massive resource input, capital investment, and labor input over the past 40 years. With the current situation, can China continue to drive high-speed or sustained development in the next few decades by relying on the same large-scale resource input, capital investment, or labor input as in the past 40 years? Clearly, three unsustainability issues have emerged.
In terms of resource input, China’s GDP in 2023 was 126 trillion yuan, consuming roughly 50% of the earth’s various resources. Out of over 190 countries worldwide, China extracts various mineral raw materials from the earth, such as iron ore, coal, oil, natural gas, limestone for cement production, and various other ores. In total, the world currently extracts about 24 billion tons of various mineral resources annually. China uses about 12 billion tons, roughly 50% of global resources. China’s GDP is about 20% of the global total, and its industrial scale and import-export trade are about 30% of the global total. In short, China consumes 50% of the world’s underground resources with 20-30% of the world’s output. If China continues at this rate, and its GDP doubles in the next 20 years, will it end up using all of the earth’s resources? Doubling GDP would require doubling resources, which is clearly impossible.
For China’s economy, industrial production source reduction, reducing resource consumption from the source; energy conservation and emission reduction, reducing the intensity of unit energy consumption and carbon emissions from the source, are crucial and essential. It is the only way for China to achieve sustainable development. This is fully reflected in China’s 14th Five-Year Plan and the 2035 Vision Goals. The central government has clearly stated that by 2035, China’s GDP per unit of energy consumption should decrease from 150% of the current global average to the global average. Currently, China’s energy consumption per unit of GDP is twice that of developed countries. By 2050, it should be reduced to the average energy consumption per unit of GDP of developed countries. In short, we need source reduction and energy conservation and emission reduction. If we continue to advance with the input methods of the past 40 years, it will be unsustainable.
In terms of capital input, China’s economy was a planned economy before 1980. Compared to a market economy, the amount of currency in circulation in a planned economy is relatively low. A market economy requires an increase in currency circulation to act as a lubricant, promoting the optimal allocation of various resources. China’s M2 money supply has grown dramatically in recent decades. By the end of 2023 or the beginning of 2024, the total amount of M2 money supply has exceeded 300 trillion yuan. Since China began issuing the renminbi in the late 1940s, it took 63 years to reach 100 trillion yuan in M2 by 2013. The second 100 trillion yuan took about 7 years, and the third 100 trillion yuan took about 4 years, from 2020 to the present. China’s money issuance is getting faster and faster, and the amount of capital accumulated is enormous.
In short, a decade ago, if China increased M2 by a few hundred billion yuan per year, the annual economic growth rate might increase by two or three percentage points, and there would be fluctuations in prices, house prices, or stock prices. In the past two years, China has increased M2 by 20 trillion yuan per year, but the stock market hasn’t moved much, house prices haven’t risen, and commodity prices don’t seem to be sensitive. Commercial banks have a huge amount of funds. Is this massive amount of M2 causing inflation? Looking at the amount of money, it seems like it should be inflation, but the market doesn’t react. Instead, it feels like deflation. Currently, this capital is not sensitive to the market. It’s all sitting in banks, not circulating. It’s not going into the stock market, not into the real estate market, and not into the pockets of ordinary people for consumption. In this sense, if China continues to rely on increasing the money supply to stimulate economic development as it did in the past 10 years, it will no longer be sustainable. The marginal effect of money supply and the sensitivity of regulation have significantly decreased.
In terms of labor input, China had a population of 600 million in 1950. After 30 years, in 1980, the population reached 1 billion. In the past 40 years, China’s population has increased by 400 million, reaching 1.4 billion. The average annual birth rate was 17.8 million in the 1950s, 24 million in the 1960s, 18 million in the 2000s, 16 million in the 2010s, and it dropped to 12 million in 2020. In 2023, only 9.02 million babies were born, demonstrating a clear and rapid decline in birth rates. People born in the 1950s had mostly retired by the 2010s. Those born in the 1960s began retiring in 2020. Currently, the new generation of young people entering the workforce are mainly born after 1990 and 2000. The number of people entering and leaving the workforce will decrease by millions each year, indicating that China’s comparative advantage of an unlimited supply of low-cost labor has reached a turning point.
China’s population base is also at a turning point. China currently has a total population of slightly over 1.4 billion. In 30 years, after 2050, it is entirely possible that the population will decrease to 1.2 billion or 1.15 billion. The population size is declining. The entire population is also heading towards deep aging. Currently, people over 60 years old account for 20% of the total population. I remember it was 18% five years ago, and now it has reached 20%. In a few decades, people over 60 will account for over 30%, creating a deeply aged society.
In short, the possibility of relying on unlimited labor input to drive rapid economic growth has diminished. Therefore, I say that the first path of global economic development, relying on massive resource, capital, and labor input for accelerated development, has passed. The development model of the past 40 years is no longer sustainable and cannot be replicated in the future.
Regarding the second path, a country engages in trade and investment with other countries, exchanging resources in various aspects. Through international trade and investment, economic openness creates complementary advantages, optimizes resource allocation, and leverages strengths while mitigating weaknesses. This process generates additional accumulation and promotes faster and better economic development. We recently said that China’s economy has entered a new pattern of dual circulation, with domestic circulation as the main body and domestic and international circulation promoting each other. Why is it called a new pattern? Because for decades, China’s economy has been mainly driven by external circulation, with large imports and exports, while also having domestic circulation. So, it was a dual circulation pattern with external circulation as the main body. Now, it has shifted to domestic circulation as the main body, which is undoubtedly a new pattern.
Here, we need to clarify what external circulation and domestic circulation mean. For a country, the volume of import and export trade, including goods trade and service trade, combined, is considered external circulation if it accounts for over 60% of GDP. 60% is a significant proportion, leaving 40% for domestic circulation. If import and export trade volume accounts for less than 40% of GDP, then that country or society is primarily driven by domestic circulation.
From 1950 to 1980, China’s import and export trade accounted for about 10% of GDP. In 1980, China’s total GDP was over $200 billion, and import and export trade was $200 billion, or 10%. Therefore, that era was a period dominated by domestic circulation. After the reform and opening up in 1980, China leveraged international resources, capital, and markets to drive economic development. With large imports and exports, processing trade, and processing with supplied materials, various forms of openness, massive foreign investment, and foreign investment bringing large investments and exports, all of these led China’s economy towards external circulation as the main driver. After China joined the WTO, external circulation reached its highest proportion in 2006. In 2006, China’s import and export trade accounted for about 71% of GDP. I mentioned earlier that if import and export trade accounts for over 60% of GDP, it is considered external circulation as the main driver. When it reaches over 70%, it is a system with a higher proportion of external circulation as the main driver. In that 71%, goods trade accounted for 64% of GDP, and service trade accounted for 7%, totaling 71%.
So, what is China’s current situation? China is now mainly driven by domestic circulation, with both domestic and international circulation. The proportion of external circulation is 38%. For example, in 2023, China’s GDP was 126 trillion yuan. China’s import and export of goods trade was over $6 trillion, and service trade was over $800 billion, totaling less than $69 trillion, which translates to about 48 trillion yuan. Compared to 126 trillion yuan, it accounts for about 38%. In 2022, 2021, and 2020, it was also 38%, less than 40%, which means it’s within the 40% range of external circulation. Therefore, China has entered a stage where domestic circulation is the main driver, with both domestic and international circulation. You might wonder, why did China’s external circulation, which used to be over 60% and even reached 70%, suddenly drop to 38% in the past decade? You might naturally think it’s because the US is waging a trade war against China, imposing tariffs, decoupling, withdrawing investments, and imposing technological blockades, implementing a whole set of geopolitical and trade protectionist measures. You might think that China is being forced to shift from external circulation to domestic circulation due to the US trade war. This judgment is wrong. Some people might also think that the COVID-19 pandemic in the past three years has fragmented China’s export supply chain and value chain, making it difficult to export and import goods, leading to a contraction in import and export trade. This judgment is also incorrect because China’s import and export trade entered a stage dominated by domestic circulation in 2016, when Obama was still president of the US, and Trump had not yet taken office, so the recent six or seven years of US-China trade war had not yet occurred.
So, what I’m trying to convey is that the era of relying on open trade flows, with external circulation as the main driver, accounting for over 70% or 80% of GDP, to drive China’s economic development is over. For China to become a major economic power in the world, it must shift to a pattern where domestic circulation is the main driver, with a trade flow that accounts for less than 40%, and is less reliant on comprehensive foreign investment or trade volume as the main driver. In this sense, the second path for China has also undergone a change in boundary conditions. Moreover, since the 2009 global financial crisis, net exports have contributed negatively to economic growth in most years. Although China’s opening up has brought about technological progress and optimized resource allocation, making a significant contribution to economic growth, in recent years, due to the US trade war and suppression against China, it will become increasingly difficult to boost economic growth through international economic cooperation.
Regarding the third path, historically, some countries have achieved primitive capital accumulation through colonialization and military conquest, which is disgraceful and increasingly rejected by the global trend of peaceful development. The 20th National Congress of the Communist Party of China clearly stated that China’s modernization is a modernization that follows the path of peaceful development and does not follow the old path of some countries that achieved modernization through war, colonization, and plunder.
Of the three paths, China cannot take the third path. The first and second paths are becoming increasingly difficult to follow. However, for China to achieve basic modernization for its 1.4 billion people and reach the level of per capita GDP of medium-developed countries by around 2035, it must ensure that economic growth remains around 5%. Taking the fourth path, that is, improving total factor productivity, is imperative. Currently, China’s total factor productivity growth rate is only 40%-60% of that of developed countries like the US and Europe, leaving considerable room for improvement. However, without the support of a technological revolution, simply relying on internal quantitative changes in the economy will be difficult to achieve significant improvement. Fortunately, China is on the eve of the fourth industrial revolution. The new technological revolution, represented by intelligent technology, provides conditions for the emergence of new quality productivity. In the face of such a significant historical opportunity, developing new quality productivity and fully unleashing the growth dividends brought by the new technological revolution will not only help improve China’s total factor productivity, reduce factor costs, and increase factor input, but also help leverage China’s new advantages in international economic cooperation. In the short term, we need to develop new quality productivity to create new growth engines and maintain economic growth momentum. In the long term, developing new quality productivity is the only way and inevitable choice to support the realization of Chinese-style modernization for 1.4 billion people.
This analysis shows that China’s 40 years of reform and opening up have left China with a growth space, namely, the huge potential of total factor productivity growth. In this sense, high-quality development in the next few decades, and becoming a major economic power in the world in the next few decades, must be driven by the development of total factor productivity. The essence of total factor productivity development is to make new quality productivity the most crucial link in China’s high-quality development.
The concept of “new quality productivity” is being put forward at this stage because it is the inherent choice, inevitable choice, and only choice for China’s high-quality economic development. Current development cannot rely entirely on resource input, capital input, and labor input, as these are unsustainable. The most important thing is to rely on technological input, input into the division of labor and cooperation in the production process, and input into fundamental institutions and production relations closely related to productivity, as well as social system reforms. In other words, through technological innovation, division of labor and cooperation, the evolution of industrial chain organization, etc., and by promoting the formation of new quality productivity and production relations that are compatible with it, China can achieve sustainable and high-quality development.
Huang Qi Fan is an academic advisor of China Finance 40 Forum, former Special Term professor at Fudan University
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