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Li Wei: Chinese Companies Boast Great Development Potential in the New Normal

China started deepening its reform in an all-around way in 2014. The year was also historically significant as it witnessed a complicated and volatile world political and economic environment, arduous tasks of reform and development in China, as well as growing economic downturn pressure in the country. Under such complicated circumstances, the Central Committee of the Communist Party of China (CPC) and the State Council realized healthy and steady economic and social development by keeping the macroeconomic policy unchanged, innovating the way to conduct macroeconomic regulation and control, and coming up with specific regulatory measures with strong determination and willpower. They also improved the quality of economic development by promoting reform in all fields, releasing benefits brought about by reform, stimulating the market's vitality by streamlining the administrative procedures and delegating powers to the lower levels.

China's GDP exceeded 63 trillion yuan ($10.06 billion) in 2014, a 7.4 percent increase from the previous year. It is indeed a hard-won accomplishment. According to the International Monetary Fund (IMF), China outperformed the US in terms of purchasing power parity in 2014. However, whether this method of calculation is scientific and accurate is debatable because there remains a wide gap between the two countries considering comprehensive strength. But the IMF's data reflects the rapid growth of China's GDP. Chinese companies had splendid performance in 2014, with 100 on the list of Fortune 500 companies. This ranked China second only to the US, which contributed 128 companies to the list. Although those companies were chosen mainly because of their sales performance, the list indicated the status of enterprises as a whole from different countries. In fact, some Chinese companies made remarkable achievements in transformation and innovation. Chinese high-speed railway makers are making rapid progress, and China now boasts the world's longest high-speed railway with the fastest development and largest scale under construction. The high-speed train has become a new representative of things made in China. In addition, Alibaba and JD.com went public in 2014 and became leaders in size globally. The two e-commerce giants have reformed the way commodities flow and also manufacturer production methods. To be frank, their feats deserve our praise.

There will be both opportunities and challenges for the Chinese economy in 2015, and it will be even harder to either meet the challenges or grasp the opportunities.

The global economy remains sluggish. According to the DRC, the world economy will stay in the adjustment phase following the crisis. Due to noticeable differences in internal structures, the world regional development will be more differentiated, but the global economy is likely to develop at a relatively low speed.

First, the US economy is expected to grow steadily. Despite the lack of noticeable improvement in labor participation rate, the US created 246,000 new non-agricultural jobs per month on average in 2014. In December, the unemployment rate fell to 5.6 percent, the lowest point since June 2008. The US economy is expected to grow steadily at around 3 percent in 2015 thanks to lower energy costs, an increase in consumption and investment, as well as the reflow of international capital.

Second, the EU economy is expected to stabilize as it slows down. High unemployment, low inflation and structural problems have made it difficult for the EU economy to recover. But economists and entrepreneurs tend to believe the EU economy will stabilize in 2015 due to such measures as quantitative easing as well as euro depreciation and southern European countries including Spain witnessing a more stable economy.

Third, Japan's economy will grow slightly. The influence of the sales tax rise on drastic economic fluctuations has weakened and the possibility of raising sales tax again after October 2014 is increasing. It is expected that the Japanese economy will grow by 1.2 percent, slightly higher than in 2014.

Fourth, emerging markets are seeing slight economic growth but aggravated differentiation. Thanks to the demand in developed countries, the economy will start to grow slightly faster in emerging markets. However, the growth momentum remains weak because the price of bulk commodities has been falling, and capital is flowing out. Slumps in crude oil prices have caused great impacts on resource-exporting countries such as Russia, Venezuela and Brazil. There is a growing possibility that the US government will increase the interest rate of dollars. This coupled with oil prices, geopolitical situations as well as regional terrorism might trigger an impact on the world, especially those emerging markets, perhaps even resulting in turbulence there. We can learn from history that economic crises are inevitable, but it is always difficult to predict where and when they break out. So we should be cautious of black swan events.

Features of change of economic stages will be more conspicuous in China. It was proposed at the China Central Economic Work Conference in late 2014 that China should have a scientific understanding of current situations, accurately study and predict the development trend, recognize features of China's economic stages in a historical and dialectical way, and accurately grasp the new normal of economic growth. The conference outlined development trends in the new normal in nine aspects.

The new normal means China's economic growth will slow down. However, China remains in a period of important strategic opportunities despite changes in connotation and conditions. China's economic trend is generally positive despite changes in the mode of economic development and economic structure.

The new normal, a concept put forward by the CPC Central Committee, is a summary of features of China's economic development in the period to come. For 2015, due to the continuous effect of China going through economic transition, experiencing the growing pains of restructuring and dealing with the consequences of previous stimulus policies, the economy is still confronted with downward pressure for the short term. Based on economic performance in 2014, it is estimated that there will be a downward trend. Since the third quarter of 2014, especially after August, the downward pressure has mounted, with major economic indicators falling. In demand, there is larger fall in investment and exports growth, except for consumption. Judging from import and export trade, employment and the Manufacturing Purchasing Managers Index (MPMI) in January 2015, the economic trend is not positive. Therefore, the Chinese economy will still be in the middle of profound adjustment in 2015, with its growth rate estimated to be lower than in 2014.

The economic situations in and outside of China are getting more complicated in 2015. While some companies are expected to have an overall performance and profit level similar to those in the previous year, some others might face grimmer challenges.

First, some State-owned companies might be stuck in a dire situation. Features of State-owned companies, including focusing on assets, procyclicality and reluctance to make a change, might make them fall prey to the new round of economic restructuring. As economic growth slows and industries evolve globally, State-owned companies might again suffer from low efficiency as the Chinese economy goes from one stage to another. Some are extremely likely to be stuck facing business difficulties.

Second, scale expansion of private companies might face greater difficulties. Some private companies might find their business shrinking and their capital chain getting tenser as there is now little room for traditional industries and it is more difficult to finance. If such companies happen to be pillar ones in some region, they will hurt the region's other industries and employment. We should be highly cautious of such events and regional risks.

Third, some micro, small and medium-sized companies may find it hard to survive. Demand for their products is getting weaker due to a sluggish world economy and an economic downturn in China. Meanwhile, costs are mounting. Labor cost is accounting for a higher percentage of small and medium-sized companies' total cost. Labor cost is on the rise in China. Workers' wages are growing at more than 10 percent year-on-year in both coastal regions and central and western regions. Severe shortages of skilled workers and technicians as well as brain drain also contribute to increasingly higher labor cost.

Fourth, it is expensive for micro, small and medium-sized companies to finance, and the problem has yet to be alleviated. A survey shows that their financing cost ranges from 12 percent to 20 percent.

Confronted with complicated domestic and overseas situations, companies should proactively tackle challenges resulting from a downward pressure and at the same time seize great opportunities from China's efforts to deepen economic reform as well as transform and upgrade its economy. To be specific, they should make the most of benefits from reform, opening-up and innovation.

First, companies should make the most of benefits from China's efforts to deepen reform in an all-around way. China started comprehensively deepened reform in 2014 and is expected to make major breakthroughs in 2015. According to the CPC Central Committee's strategic plan from 2014 to 2020, 55 out of 336 items on the reform agenda will be completed in 2015, with the focus shifted to the market system, the market order and the mechanism that ensures market competition.

One example is reform of State-owned companies. Frankly speaking, progress was slow in State-owned enterprise reform as a whole in 2014, with reform remaining in a stage of exchanging ideas and formulating top-level designs, a far cry from public expectations. However, repeating exchange, patient communication, heated discussion and consequent release of local reform plans have laid a foundation for the top-level design of State-owned company reform.

Substantive progress is expected in 2015. Leadership at State-owned companies should seize the opportunity to reform and stimulate companies to develop through innovation. Private companies will have a fairer market, and it will become easier to enter into the market. Both the central government and local authorities are planning to open the fields of infrastructure and public service to private capital. In fact, authorities concerned have formulated regulations about franchising, providing new market opportunities for private companies.

Second, companies should make the most of benefits from China's expanded efforts to open up to the outside world. As regional economic integration and the effort to build free trade areas are gathering momentum, China will strengthen its opening-up campaign, thus generating a series of benefits including lower tariff, easier travel, broader market and a more prosperous tourism industry. Thanks to the Belt and Road Initiative, Chinese companies will have more opportunities in overseas infrastructure building as well as development and construction in relevant industries. At the 22nd APEC meeting, President Xi Jinping announced that China will invest $40 billion to establish a fund to offer financial support to such programs like infrastructure building, resources development and industrial cooperation in countries along the Silk Road Economic Belt and 21st Century Maritime Silk Road. This came after China's proposal to build the Asian Infrastructure Investment Bank.

Last month, the DRC and the Center for International Relations and Sustainable Development (CIRSD) held a conference on the Belt and Road initiative at Istanbul, Turkey. The center is headed by Vuk Jeremic, former Serbian foreign minister and president of the 67th UN General Assembly. We learnt at the conference that many countries along the Silk Road Economic Belt and the Maritime Silk Road have expressed a strong interest in the initiative.

Third, as Chinese companies speed up their pace to go global with the support of policies, they should guard against risks, especially long-standing political and social risks in some developing countries. According to the Ministry of Commerce, China's overseas investment reached about $140 billion in 2014, more than the year's use of foreign investment in China. That means China has become a net capital exporter.

As Chinese companies bid for overseas programs, they should study policies, laws, political and economic situations, social structures, as well as the history and culture of destination countries. They should analyze, evaluate and prevent all possible risks and come up with contingency plans. In the win-win spirit, Chinese companies should strictly obey local laws and regulations and respect their customs so as to ensure long-term development.

Third, Chinese companies should make the most of the benefits from the latest round of global technological revolution. Since the global financial crisis in 2008, many countries are seeking ways to get rid of its influence and find new economic powerhouses. A new round of technological and industrial revolution is in full swing, and competition among countries is getting fiercer.

The Obama administration has proposed the "reindustrialization" strategy. Its aim is more than enabling traditional industries to stage a comeback. To be specific, it wants to seize the high-end manufacturing industry and facilitate the development of modern manufacturing that include artificial intelligence, robotics technology and digital production so as to consolidate and maintain its strategic goal of being the world's top economic superpower.

In Europe, Germany released its Industry 4.0 strategy, which is designed to make full use of information and communication technology as well as the combination of virtual cyberspace and information physics to make manufacturing smart. Japan, despite its weak economy, boasts many advantages in new-energy vehicles, energy-saving new materials and robotics. It has increased its investment in those fields and has globally advanced hybrid technology and fuel cell technology.

There will be more innovation worldwide in 2015. Some major technologies will take less time to commercialize. Cross-industrial integration, industrial shakeup and advantage reshuffling will become a new normal. The new round of industrial revolution will pose challenges and offer opportunities to China. Generally speaking, China has the world's largest manufacturing industry, but it is not strong enough, with a great part of it in the stage of Industry 2.0 or 3.0 and calling for upgrading.

China and developed countries are standing at the same starting point in terms of many new technological fields, like additive manufacturing, robotics, decentralized energy, smart power grids, Internet of Things and new materials. It is possible for China to gain a head start. In the traditional sector, China should speed up its pace to catch up. In the sector of new technologies, it should create opportunities for leading development. Entrepreneurs should keep a close eye on changes in new technologies, increase investment in R&D, improve innovation, build a sound stimulus mechanism, enhance innovation in the business mode and strengthen cooperation in a bid to realize breakthroughs in the new round of technological revolution.

2015 is the last year of the 12th Five-Year Plan period (2011-2015) and a year crucial to deepening reform in an all-around way and opening up a new chapter of innovation and development. There are new historical opportunities for companies to seek further development as China implements the Belt and Road initiative, the Beijing-Tianjin-Hebei coordinated development plan as well as the Yangtze River Economic Belt project; pushes forward new industrialization, informatization, urbanization and modernized agriculture drives; deepens reform in an all-around way; and practices rule of law.

Premier Li Keqiang said at the Davos Forum 10 days ago that China will adapt to the new normal by striving for long-term medium-high growth and improving the quality of development. I believe that Chinese companies have great possibilities in the new normal, but only those who are willing to study the overall situation, who are able to seize the opportunities and who are courageous enough to blaze new trials will go through ups and downs in the market and finally make great achievements.

The article is excerpted from the keynote speech DRC President Li Wei delivered at the 13th China Enterprise Development Forum.

The author is Li Wei, President and research fellow of the Development Research Center of the State Council (DRC).

The article appeared in the China Economic Times, Feb 2, 2015.