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The Key to Stable Growth under Structural Transformation

Apr 23-2025   



*This article is based on an article by Zhao Bo, associate professor of economics of National School of Development at Peking University.

 

The Key to Stable Growth under Structural Transformation Lies in the Effective Combination of Old & New Kinetic Energy

 

At the critical stage of economic transformation and upgrading, the essence of sustained stable growth lies in promoting the smooth replacement of old and new kinetic energy to avoid falling into the "middle-income trap" or "high-income trap". How can this be achieved? The secret to breaking the 'trap' is the ability to innovate, i.e. to continuously improve total factor productivity through structural transformation and institutional reform, and to create new engines of economic growth.

 

For a long time, the construction and real estate industries have played a key role in driving China's macroeconomy. However, with the changing demographic structure, the increasingly complex external environment and the growing uncertainty of domestic demand recovery, the old model has become unsustainable and the new development momentum is still in the cultivation stage. Against this backdrop, accelerating the transformation of industrial structure so that the traditional growth engine can adjust smoothly and emerging industries can grow smoothly has become the key way for China's economy to maintain stable growth.

 

How to balance short-term stable growth and long-term transformation? On the one hand, in the short term, macro policies play a counter-cyclical hedging function, especially focusing on key industries such as real estate to prevent them from experiencing an over-anticipated downturn; on the other hand, it is even more necessary to strengthen emerging industries through reform and innovation, and form a new dominant industry to support future growth.

 

In promoting the formation and development of emerging industries, it is very important to do a good job of innovation. Innovation is the first driving force, and private enterprises are the main body of innovation. A large amount of data shows that the contribution of private enterprises to innovation in China is more than 70 per cent, and they are the main force in the digital economy, new energy, high-end manufacturing and other fields. Therefore, a more open, inclusive and stable policy environment should be used to provide more space for private enterprises to increase R&D investment and conduct technology research.

 

In addition, the combination of industrial policies and the role of the market is an important focus of government work. In the market cannot effectively solve the weak links, the government can provide support through industrial funds, fiscal and tax incentives, financing guidance, but at the same time must strictly guard against the risk of distorting market competition, interfering with the exit mechanism of enterprises.

 

Overall, "stable growth" must be from the macro, industry and reform of the three synergistic efforts: macro-level attention to the total amount and expectations management, industry level to mitigate the risk of leading industries and promote the rise of emerging industries, the reform level is focused on the construction of systems and long-term mechanism. To truly break out of the "middle-income trap", it is necessary to let the innovation ability run through it. There is a high degree of consensus among all parties on key reforms such as basic research, private enterprise innovation, structural adjustment and opening-up, especially on the need to form an effective 'synergy' between the central and local governments, and between the government and the market.

The Key to Stable Growth under Structural Transformation

Apr 23-2025   



*This article is based on an article by Zhao Bo, associate professor of economics of National School of Development at Peking University.

 

The Key to Stable Growth under Structural Transformation Lies in the Effective Combination of Old & New Kinetic Energy

 

At the critical stage of economic transformation and upgrading, the essence of sustained stable growth lies in promoting the smooth replacement of old and new kinetic energy to avoid falling into the "middle-income trap" or "high-income trap". How can this be achieved? The secret to breaking the 'trap' is the ability to innovate, i.e. to continuously improve total factor productivity through structural transformation and institutional reform, and to create new engines of economic growth.

 

For a long time, the construction and real estate industries have played a key role in driving China's macroeconomy. However, with the changing demographic structure, the increasingly complex external environment and the growing uncertainty of domestic demand recovery, the old model has become unsustainable and the new development momentum is still in the cultivation stage. Against this backdrop, accelerating the transformation of industrial structure so that the traditional growth engine can adjust smoothly and emerging industries can grow smoothly has become the key way for China's economy to maintain stable growth.

 

How to balance short-term stable growth and long-term transformation? On the one hand, in the short term, macro policies play a counter-cyclical hedging function, especially focusing on key industries such as real estate to prevent them from experiencing an over-anticipated downturn; on the other hand, it is even more necessary to strengthen emerging industries through reform and innovation, and form a new dominant industry to support future growth.

 

In promoting the formation and development of emerging industries, it is very important to do a good job of innovation. Innovation is the first driving force, and private enterprises are the main body of innovation. A large amount of data shows that the contribution of private enterprises to innovation in China is more than 70 per cent, and they are the main force in the digital economy, new energy, high-end manufacturing and other fields. Therefore, a more open, inclusive and stable policy environment should be used to provide more space for private enterprises to increase R&D investment and conduct technology research.

 

In addition, the combination of industrial policies and the role of the market is an important focus of government work. In the market cannot effectively solve the weak links, the government can provide support through industrial funds, fiscal and tax incentives, financing guidance, but at the same time must strictly guard against the risk of distorting market competition, interfering with the exit mechanism of enterprises.

 

Overall, "stable growth" must be from the macro, industry and reform of the three synergistic efforts: macro-level attention to the total amount and expectations management, industry level to mitigate the risk of leading industries and promote the rise of emerging industries, the reform level is focused on the construction of systems and long-term mechanism. To truly break out of the "middle-income trap", it is necessary to let the innovation ability run through it. There is a high degree of consensus among all parties on key reforms such as basic research, private enterprise innovation, structural adjustment and opening-up, especially on the need to form an effective 'synergy' between the central and local governments, and between the government and the market.