China’s economy steps into “new normal,” no turning back

While the growth rate for the first
quarter of 2015 was the slowest since 2009, a closer look at the data
shows that China is on track for a "new normal" in economic development,
featuring slower but higher quality growth.

First quarter's growth declined to 7 percent from the previous
quarter's 7.3 percent, the weakest performance since the global
financial crisis, when growth fell to 6.1 percent in the first quarter
of 2009.

Some doomsayers forget that much of the decline has been self-imposed
as the country tries to steer the economy to more sustainable growth
driven by domestic consumption, the service sector and, most
importantly, innovation.

There used to be an "old normal" during the 35 years between 1978 and
2013, when annual growth of the Chinese economy averaged close to 10
percent. Between 2003 and 2007, it was over 11.5 percent.

However, the good old days cannot last forever. Growth decelerated to 7.7 percent in 2012 and 2013 and to 7.3 in 2014.

Even if the old normal could continue, it is not desirable, as three
decades of almost uninterrupted double-digit growth came at the high
price of air pollution and exploitation of natural resources.

The Chinese economy has embarked on a new track featuring a shift
from high-speed growth to medium-high growth, a shift from quantity and
speed to quality and efficiency, and a shift to an innovation-driven
growth model.

The first-quarter data is filled with signs that this transition is taking place and a new growth mode is coming into form.

Energy consumption per unit of GDP continued to fall, marking a drop
of 5.6 percent in the first quarter after last year's 4.8-percent
decline.

The service sector, which grew much faster than the industrial sector
and the economy as a whole, accounted for 51.6 percent of GDP in Q1, up
from 48.2 percent in 2014 and 46.9 percent in 2013.

Thanks to efforts to cut red tape, simplify administrative procedures
and cultivate new growth engines, newly registered companies mushroomed
and high-tech industries blossomed.

The number of newly registered companies surged 38.4 percent from
January to March, while new energy automobiles and robotics saw
industrial output gain more than 50 percent during the same period.

Fan Jianping, chief economist at the State Information Center,
pointed to the changes in the industrial sector as evidence for the
transformation in the Chinese economy.

While industrial output grew 6.4 percent year on year in the
January-March period, down from 8.7-percent growth a year ago, the
industrial structure continued to improve.

The industrial value added of the high-tech sector and equipment
manufacturing jumped by 11.4 percent and 7.7 percent respectively in the
first quarter, outpacing overall growth.

In 2014, the country's spending on research and development (R&D)
accounted for 2.1 percent of GDP, a record high. The proportion in some
regions such as Shanghai reached up to 3.6 percent.

A focus on innovation has made some Chinese companies, such as telecommunications giant Huawei, climb up the value chain.

The Shenzhen-based company, which was on a shoestring budget at the
time of its founding in 1987, reported a 32.7-percent increase in
profits in 2014 to 27.9 billion yuan. Its revenue grew to 288 billion
yuan, up 20.6 percent.

A close look at the company's track record reveals its main driver of
growth is its attention to innovation and R&D. In 2014, 40.8
billion yuan went toward R&D, 29.4 percent more than in 2013 and 14
percent of the company's revenue.

In the past decade, Huawei has spent more than 190 billion yuan on
R&D. Of its 150,000 employees, more than 45 percent are in
innovation, research and development positions.

There is still a lot more potential and room for China's
manufacturing sector and companies to upgrade themselves, and this will
be where the future of the Chinese economy lies, J.P. Morgan China chief
economist Zhu Haibin told Xinhua in an interview.

While overcapacity is cut in energy-intensive sectors such as steel
and cement, the output of which slumped 3.6 percent and 20.5 percent
respectively, growth of emerging sectors will accelerate and play a key
role in the long-term development of the economy, Zhu said.

In addition to innovation, the "Internet Plus" action plan unveiled
by Premier Li Keqiang during the parliamentary sessions in March will
serve as another new engine for future sustainable growth, Zhu added.

The plan aims to integrate mobile Internet, cloud computing, big data
and the Internet of Things with modern manufacturing. It will also
encourage the healthy development of e-commerce, industrial networks,
and Internet banking and help Internet companies increase their
international presence.

In addition to Internet giants such as Alibaba, Baidu and Tencent,
many traditional companies are also looking to the Internet as a tool to
transform themselves.

Despite a cooling consumer market, Haier, China's leading home
appliance maker and one of its first firms to have established a global
presence, recorded 19.6-percent net profit growth in 2014, thanks to its
"determined shift" to an Internet-based factory-to-consumer business
model.

In a few short years, Haier Group has been quietly building
Internet-based smart factories, where factory-based production of
customized products has replaced traditional large-scale manufacturing.

Li Pan, vice president of Haier's home appliance industry, told
Xinhua that many of the company's products are designed to cater to
special user needs.

The growth model and potential of companies such as Huawei and Haier
will be the new normal of the Chinese economy, and there is no turning
back to the old development path, Fan at the State Information Center
said.