This article is a keynote speech that Li Wei, President of the Development Research Center of the State Council (DRC), made at the DRC Think Tank Forum New Year Forum 2015 on Jan 10, 2015.

2015 will be an extraordinary year for three reasons. First, President Xi Jinping's scientific discourse that China's economy is entering a new normal phase will be adopted as a general idea when we formulate development strategies, plans and policies in the new period. Second, 2015 is not only the last year of the 12th Five-Year Plan (2011-2015), but also the year in which the new Five-Year Plan (2016-2020) is formulated. It is of great significance as a link between the past and the future. Third, 2015 is also essential to lay a good foundation to complete the task of comprehensively deepened reform in 2020. To do a good job in 2015, a very important prerequisite is to comprehend and follow the logic of "understanding the new normal, adapting to the new normal, and leading the new normal" for China's economic development at present and in the future. The new normal of economic growth is an inevitable phase as China's economy evolves into a higher stage with more complicated division of labor and more reasonable structure. To realize the evolution, current stage tasks in the economic reform need to be finished, structural adjustment and transformation in the development mode need to make substantial progress, and the new powers for economic growth need to take form. These are three signs that mark the evolution has finished.

I'd like to talk about some of my understandings focusing on accelerating the cultivation of new powers for economic growth through innovation in a new normal of economic growth.

I. Adapting to and leading a new normal must be based on a scientific understanding of the new normal

President Xi Jinping gave a systematic analysis of the economy's new normal at the Central Economic Working Meeting held last month and summarized the trend changes brought by a new normal. This is the starting point where we can have an understanding of the new normal. Only with a profound understanding about these changes, can we understand, adapt to and lead the new normal in a scientific way. I believe that to increase the understanding of it, it is necessary to scientifically analyze the internal and external changes facing China's economic development, along with the new opportunities and challenges, as well as the new requirements for development in the new stage.

The most remarkable change in external environment is the profound adjustment of the world development pattern. As globalization develops and China's status and influence rise in the world economy, China's development is increasingly impacted by the international development pattern. When making plans for the development of China, it is crucial to have a sober understanding about the change of the world pattern, which has some adjustments in the following aspects.

First, the world economic growth pattern has been changing dramatically. With the impact of the international financial crisis, major economies in the world have adopted various measures to boost economic growth. But the prospects for economic growth are still dim so far, and there is no sign of an up-trend. According to the prediction of the International Monetary Fund (IMF), the US saw a growth of 2.2 percent in 2014, keeping flat with the previous year. Japan's revised GDP shrunk by an annual rate of 7.3 percent and 1.9 percent in last year's second and third quarter, respectively, indicating that Japan was in a technical recession and resulting in yearly GPD growth of around 1 percent. The statistics of the European Union's Statistical Office showed that the eurozone's economic growth was zero in the second quarter of 2014, with quite a few economists doubting that the annual growth goal of 0.8 percent could be reached. The IMF estimated that the economic growth of transition economies and developing countries would drop to 4.4 percent from 4.7 percent. India's growth has decreased to 5.6 percent from about 10 percent in 2010, and that of Latin America reached the lowest in 2014 over the past 10 years with Brazil standing at only 0.2 percent of growth. Meanwhile, according to Morgan Stanley, Russia's growth would also drop to 0.6 percent. These figures show that both developed economies and developing countries will encounter profound, complicated and intertwined structural contradictions that can't be addressed in a short period of time and require deep system reform. As long as these contradictions are not completely addressed, the global economic pattern will still be unstable and turbulent. The economic and trade growth will hardly recover to the level before the crisis.

Second, the world pattern of division is taking new shape. To catch up with developed countries, developing countries are accelerating industrialization. While influenced by the international crisis, developed economies have also carried out a reindustrialization strategy, resulting in an even more complex relationship between the division of developed and developing countries. In addition, as technologies advance in transportation and communication, competition in the low-end production areas becomes fiercer, so that the division of the global value chain is more favorable to developed countries that sit at the end of value chains. Some statistics show that earnings from global investment of multinational corporations have continued to increase over the past few years, with major developed countries as the biggest beneficiary of globalization. From 2008 to 2013, the overseas profit growth of US multinational corporations increased by 93 percent, or $2.3 trillion. In the 2013 financial year, by March 2014, Japan's listed enterprises saw their business profits grow by 22 percent year-on-year in Asia, a new record. These facts indicate that the developing countries will face more severe challenges in international competition in division remodeling.

Third, the global economic pattern is becoming increasingly complex. Since there are no breakthroughs being made in the new round of WTO negotiation, various kinds of regional cooperative initiatives and systems have been established consistently that deepen regional cooperation; make world economic governance more complicated, changeable and uncertain; and to some extent, have an impact on international trade development. International trade statistics can also serve as proof. The world trade growth is usually twice the world economic growth and, according to the WTO and other international institutions, the average growth of world trade volume was 6 percent for the 20 years before the world financial crisis in 2008, while the figure was only 3 percent and 3.1 percent in 2013 and 2014, respectively.

Fourth, global politics and economics have a closer relationship and influence each other more than ever. Though politics and economy are two different areas, they are never separated. With the increasingly intense competition in the world, politics tends to increase its intervention in economics. Geopolitical crises have more influence on the world economy and are quite frequent, sharp and unpredictable. The problems in Russia, for example, are hard to explain completely and reasonably just from an economic perspective.

Looking at the internal environment in China, the newest and biggest difference is that the country's development is confronted with some unprecedented constraints.

First, the contradiction between insufficient development at an absolute level and the unexpected arrival of an aging society has become apparent. China is far behind developed countries in development level, but its working-age population has a tendency to decline in absolute terms. As a result, the population creating social wealth is decreasing relatively, while the population depending on social support is increasing relatively. In 2013, China had an aging population above 60 years old of more than 200 million, and the figure accounted for 15 percent of the total in 2014, much higher than the traditional standard of 10 percent for an aging society. As there are less working-age people and more that depend on society, it is very pressing to improve productivity.

Second, there is a sharp conflict between insufficient scientific and technological innovation capacity and an urgent demand for transformation and development. It's clear that the fundamental support for transformation and development is scientific innovation. Frankly speaking, although China's innovation ability has improved over the past few years, it is not strong enough to prop up China's industrial upgrading. Also, in spite of emphasis on driving forces for years, we are still in short of new driving forces for development. Another notable feature for insufficient innovation ability is China's high dependence on developed countries in terms of core technologies needed in many industries. In 2013, China's total value of imported integrated circuits exceeded that of crude oil, at $231.3 billion.

Third, the conflict between the development pressure on resources and environment and people's demand for an improved living environment is intense. In 2014, China's GDP would amount to around 65 trillion yuan ($10.48 trillion), and further economic growth will bring greater pressure on China's resources and environment. Meanwhile, people's demand for a better living environment has also become higher and more pressing because the bearing capacity of air, water and land pollution southeast of the Hu Huanyong Line – an imaginary line drawn by Chinese geographer Hu Huanyong in 1935 that divides China into two approximately equal parts and marks a striking difference in the distribution of the country's population – has reached their limits.

Fourth, there is an obvious contradiction between the large income gap and the mass desire for equity and justice. According to the State Statistics Bureau, China's Gini coefficient was 0.437 in 2013, above the global warning line of 0.4. The long-lasting huge income gap has caused or aggravated a series of social contradictions. In addition, China has nearly 200 million residents living in urban areas but without urban registered permanent residence. Such residents eagerly ask for a narrowing of the gap in urban social public services in education, medical care and housing. This poses new challenges to the harmony and governance of the society.

Apart from above external and internal changes, the new round of technological revolution across the world will have a far-reaching influence on China's development in the future. History shows that all technological revolutions have had an important impact on production models, consumption patterns and even the human development process. In the 18th century, the first technological revolution characterized by steam engine technology brought humans into the era of mechanization. In the period from the end of the 19th century to the first half of the 20th century, the second technological revolution represented by electrical machines and chemical engineering led humans into an era of electrification, atomic energy and aerospace exploration. From the latter half of the 20th century, the third technological revolution featured by information technology started the era of the Internet. A new round of technological revolution focused on 3D printing, distributed energy resources and the Internet of Things is going to take place. As the results of the new and last round of technological revolution combine together, they will greatly affect the current patterns of production, commodity circulation, consumption and communication. New opportunities will appear, while man will encounter huge challenges in industrial development, economic management and social governance. Meanwhile, this will cause a shuffle of economic globalization.

So, these environment and condition changes create higher demands for development in the new period. It calls for equal attention to the growth of material wealth and the progress of society, social wealth and its creation, the growth rate and its intensity, economic efficiency and social equity, and modern development and development space for our descendants. Only by developing in such ways can we make the best use of things, highlight social equity and fairness, and march in line with the right direction of social progress.

II. Adapting to and leading a new normal must accelerate fostering new powers for economic growth

Facing the new environment, opportunities, challenges and requirements in the economy's new normal, it is essential to fully understand that development is of overriding importance and is key to solving all problems of the country. China has to constantly promote development to avoid falling into the middle-income trap and to maintain China's independent status in the world. It's well known that development is essential, so China needs to keep its economy growing at a certain rate in the new normal. This means that growth can be relatively slower, but it is still a definite must. The growth rate we need, of course, is different from the traditional growth pattern, but it must still be a quality, effective and sustainable rate powered by new driving forces.

First, a certain rate of growth is inevitable for China entering a new stage. After more than 60 years of development, especially in reform and opening-up for the past three decades, China has turned into a middle income country from a low-income country. But its modernization is not finished yet. In 2013, China's per capita GDP was about $7,000, accounting for only one-eighth of the US and representing a large gap between that of Chile, Turkey and Brazil. It ranked just around 80th across the world. To realize the great rejuvenation of the Chinese nation and construct a modern and strong country whose people are rich, China has to maintain sustainable, fast and stable economic growth for the following reasons.

On the one hand, it is important for China to become a high-income society. From a general survey of world economic development history since the industrial revolution, it is found that the key factor deciding a country's development is whether or not the country's economy can develop at a certain rate. During the past 30-plus years, China's GDP had an average annual growth of around 10 percent. But this doesn't mean the stable growth will last forever. If the economy stopped growing, all efforts for the country's modernization would be wasted. Second, growth is necessary for social stability. Employment is the essence of people's livelihood, and it is also the cornerstone of social stability. So, to maintain a stable society, a certain growth rate is crucial for creating jobs. China is facing a decreasing working-age population, so considering the labor force supply and demand, the employment pressure is not huge. However, as the structure of labor supply and demand changes in the future, the structural contradiction in the labor market will stand out. In the future, China will have more than seven million undergraduates, graduates and PhD graduates per year, who all want decent work. Considering relevance and continuity between economic growth and employment, only when linked and moderate growth is assured, can more and better jobs satisfying social demand be created.

On the other hand, keeping stable economic growth is essential for preventing financial risks. Local government debt risk, financial system risk and business operation risk are likely to be covered up in the stage of high-speed growth due to rise of factors, like asset price. In fact, China's financial risks have already accumulated to a certain level that can't be ignored. Statistics announced by the national audit office showed that the government debt at all levels had amounted to 30 trillion yuan ($4.80 trillion) by the end of June 2013, equal to 51 percent of 2013's GDP. If there were a remarkable decrease in economic growth rate, asset prices would shrink substantially, resulting in a sharp fall in the business profit rate and a big impact on fiscal revenue increase. This may turn potential financial risks into realistic threats.

Second, economic growth in the new normal has to depend on new driving forces. There are different perspectives on powers for economic growth, for example market demand, factor inputs or the allocations of resources. Looking at economic growth in terms of market demand, the old economic growth powers were characterized by heavily relying on investment and export with consumption not given full play. The new powers give domestic demand, especially consumption demand, full play in economic growth. Viewed from the perspective of factor inputs, old powers focused on investment, resources, and a large and extensive increase of labor, but there was not enough technological progress. The new factor inputs are an efficient and intensive use of capital, resources and labor in combination with the increasingly important role of technological advancement. If taking allocations of resources into consideration, the old powers for economic growth come from resource transfer among sectors and regions to improve allocation efficiency, but new powers depend more on optimal resource allocation in sectors and regions.

Only with these new powers for China's economic growth, can the country have a chance to face the challenges of the global long-term economic downturn, create more social wealth with less resources and labor, deal with an aging population, break environmental constraints to development, balance the interests of all levels of society, create a support environment for sustainable development, meet people's expectations for development in a new normal of slower but quality growth and push China's social progress forward.

III. Adapting to and leading a new normal must take innovation as a fundamental way to foster new powers for economic growth

The key to adapting to a new normal lies in forming new powers for economic growth that calls for innovation. China needs product innovation and new markets, making domestic demand, especially consumption demand, play a bigger role in economic growth. It needs innovation in forms of production organization and in production process for higher efficiency of resource utilization. It needs innovation in systems to improve efficiency of resource allocation. Technological innovation, for sure, is the most important as it is the foundation for all other innovation. Just as Freeman Dyson, an American physicist and mathematician, said, "Technology is a gift of God. After the gift of life it is perhaps the greatest of God's gifts. It is the mother of civilizations, of arts and of sciences."

Innovation is a complicated and systematic process. It requires a well-planned direction, clear awareness of key innovative areas, utilization of various resources, and a favorable environment. China, thinking about its demand of forming new powers for economic growth and adapting to the changes of development environment and conditions at home and abroad in the new economic growth phase, needs to grasp the general trend of global technological progress and use all innovation resources to facilitate China's transformation from a big nation of innovation resources to a strong power of innovation ability. China also needs to make innovation a powerful engine for leading and pushing development transformation.

First, efforts should be made to promote technological innovation. The 2014 World Intellectual Property Indexes Report, released by the World Intellectual Property Organization, showed that in 2013, China's patent applications accounted for 32.1 percent of the total across the world, surpassing that of the US and Japan, respectively, and nearly the sum of the US and Japan combined. Concerning application quantity, China was no doubt a great innovation power. However, the country's level of innovation was low for of all its authorized patents, less than one-sixth were for patents for invention and more than 30 percent were for appearance design. The same year, three-fourths of Japan's total authorized patents were patents for invention and less than 14 percent were for appearance design. This indicates that more efforts should be made in technological innovation in China in the future. China has a late-mover advantage to learn experiences from developed countries in terms of traditional technology as an approaching modern country, but it is also confined to making some inventions in fringe areas due to late-starter disadvantages. As for some new technological areas such as addictive manufacturing, digital robots, distributed energy resources, smart power grids, the Internet of Things and new materials, China is almost at the same starting line with developed countries, which means China has the chance to be at the forefront and even play a leading role in innovation. The country needs to allocate its innovative resources as a whole and look for major innovation breakthroughs in such new technologies.

Second, efforts should be made to promote innovation in the way production is organized as its adjustment and optimization will generate an important impact on economic and social development. Adjusting the way of production organization will help cut production costs and improve efficiency when technological conditions remain unchanged. One example is Ford’s revamp of its production line, which reduced the time to assemble a chassis to 1.5 hours, 11 hours less than previously required. That means the efficiency of the new production line was almost 10 times that of the previous one.

The application of innovative results depends on innovation in the way production is organized. For example, the popular Internet of Things will not produce maximum social and economic effects until it is combined with innovation in the way of production organization. Changes in demand will call for reform in the way production is organized. Since household income is rising, people now have more demand for customized and individual production. In such a populous country as China, despite a growingly diversified demand, the total size of any specific kind of consumption is huge. For China, two things should be borne in mind when it comes to adjusting production organization: first, apply results of new technological revolution so as to optimize the process of large-scale and intensive production; and second, adapt to the trend of an increasingly diversified demand in the market to develop small-sized and customized production.

Third, stress should be laid on encouraging innovation in business models. Business is indispensable to social reproduction. So business innovation will affect not only business itself but also consumption and production. In other words, it will help expand the existing market to create new demand and in the meantime lower the cost of production and make production better suited to consumption.

Fruits of the new round of technological revolution, especially the development of Internet and Internet of Things technologies, have created and will continue creating chances for innovation in business. It is by grasping such a chance that Alibaba has grown into a globally renowned business. China boasts an age-old business culture and has the wisdom to innovate business models. Business model innovation requires a free and inspiring environment as well as changes in guidance and standards. So it is essential to build an environment that guarantees fair competition and a system that features mutual trust. Meanwhile, efforts should be made to enhance intellectual property protection and improve the supervisory system’s ability to produce timely responses. Acts that disrupt market competition in the name of business innovation should be banned to ensure that such innovation is on the right track.

Fourth, domestic and overseas resources should be comprehensively utilized. The new round of technological revolution is more difficult, complicated and influential than any of its predecessors. So any nation, big, small, developing or developed, will find it hard to shoulder the burden all by itself. With many years of efforts, China has accumulated rich resources for innovation. But it should not close its doors. Instead, it should learn from their successes and lessons, expand the scope of innovation, enrich its connotations and better utilize global resources. Of course, efforts should be made to improve originality during this process. Without originality, it will be difficult for China to get involved in global innovation and to benefit from its results.

I remember the 19th century US physicist Henry Rowland said something to the effect that one should not wait to pick crumbs that fall off the table of the rich and feel he is even richer because he has more crumbs. Rowland said people should not ignore the fact that the rich have bread and that is the source of crumbs. His words inspire us to see that China must improve its ability in independent innovation and come up with its own world-class results if it wants to gain the initiative and be the winner in future competition.

Fifth, the pace should be sped up to build an innovation-friendly environment. Innovation requires a suitable environment just like trees require sunshine and rain. An innovation-friendly environment is composed of different elements, including the four major pillars of government, universities, research institutes and companies. Their roles are different and cannot be replaced. The government must offer policy support and institutional guarantee. It must also play a conducive or even leading role in cutting-edge, generic technologies.

The role of universities lies in basic research and personnel training. Research institutes are expected to explore new roads to apply fundamental science. Companies must commercialize research results. To build an innovation-friendly environment starts with handling relations among the four. Meanwhile, China's policies and systems about innovation should be improved to invest limited resources in fields of strategic importance that will decide its long-term development.

The most important things are, as arranged at the Third Plenary Session of the 18th CPC Central Committee, to "enable the market to play a decisive role in resource allocation while the government does what it is supposed to do". Efforts should be made to promote reform in various fields, especially technological innovation, to build and improve the system that innovation requires and mobilize the public for innovation. In addition, basic studies, research and development of applied technologies; commercialization of research results; and value innovation need to be well connected and linked so innovation becomes the primary power for productive force.

History, especially since the Industrial Revolution, shows that a country's development will develop from one state into another as a result of technological advance as well as internal and external changes. A new normal is the result of development in the past and meanwhile decides the direction of development in the future. However, the new normal is not the sole determinant; strategic and policy choices also matter.

To make a correct strategic and policy choice, it is essential for us to conduct extensive and in-depth studies based on President Xi Jinping's Thought on the Chinese Economy entering into a new normal and by taking advantage of the wisdom and resources of all parties in society. As a think tank that offers direct services to the Party and the State Council, the Development Research Center of the State Council (DRC) would like to explore with all of you the roads of development in a new normal of economic growth so as to make contributions to promoting it into a higher stage.

Source: China Economic Times, Jan 12, 2014