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　　Cai Fang (蔡昉)*

　　The Chinese Academyof Social Sciences

　　Abstract:Thispaper creates an analytical framework for ongoing China ’s economic slowdown andreveals the major factors affecting potential growth rate. First, proceedingfrom the factors that led to a decline in China ’s potential growth rate, thispaper demonstrates that the slowdown since 2012 is not caused by demand-sideshocks but is a natural result of the demographic transition and the change ofeconomic development stage that stemmed from supply-side factors. It istherefore suggested that the demand-side perspective for cyclical analysis mustbe abandoned and the supply-side perspective for growth analysis ought to befollowed. Secondly, this paper argues that it is theoretically unfounded andempirically unconvincing for existing literature based on the growthperspective to simply apply the statistical pattern of “regression towards themean” to forecast China’s growth outlook and thus arrive at pessimisticconclusions. On this basis, this paper identifies a host of initiatives thatcan significantly increase potential growth rates and proposes policyrecommendations for deriving reform dividends from supply-side structuralreform.

　　Keywords:growthslowdown, potential growth rate, supply-side, dividends of structural reform

　　JEL Classification Code: O40, O38, L16

　　1. Introduction

　　As a global phenomenon, economic slowdown hasbeen widely debated in the business community and economics academia. When viewedin the context of middle-income countries, economic slowdown finds expressionin another topic: the “middle-income trap.” In reality, both the causes andmanifestations of economic slowdown vary across countries, with each requiringa different perspective. Chinese and international scholars have put forwardinsightful yet different ideas on the causes and countermeasures of globaleconomic slowdown and its impact on world economic outlook. Their differences inviews are more striking when it comes to economic slowdown in a particularcountry.

　　Regarding the reasons for China ’sslowdown after 2012, opinions differ and sometimes are even polar opposites ofeach other among opinion leaders, economists and even decision-makers. A misunderstandingof the economic situation will lead to unjustified pessimism about China ’s economy as well as wrongly blaming China for the world’seconomic woes. Worse, the misperception will misguide China ’s policyoptions. Given the depth and persistence of the current round of economicslowdown, a correct understanding and poised reaction is not only essential forChina to surmount the “middle-income trap” and build a moderately prosperoussociety in all respects, but is also pivotal to world economic confidence andoutlook. China ’sthree decades of uninterrupted economic surge and rags-to-riches story areinspirational to developing countries. Yet only by soundly tackling the currentslowdown will the China miracle come to a perfect completion and will the Chinese experience haveconvincing referential value. Thus, China ’s economic slowdown shouldand deserve to be an important topic of discussion in mainstream economics.

　　Since the adoption of the reform and opening-uppolicy in 1978, China ’seconomy sustained rapid growth for over three decades, with the annual growthrate averaging 9.9% until 2011. Despite some volatility (after growth rate exceeded9% in 1982, it fell below 8% in 1989-1990 and 1998-1999, respectively), theeconomic boom in this period was unprecedented in China’s history. Consideringthe minimum growth target of 8% for this period[1], thispaper defines the first year when China ’s growth continually fellbelow 8%, i.e., 2012, as the starting point of the slowdown. After falling to7.7% in 2012 and 2013, China ’sgrowth rate further dipped to 7.3% and 6.9% respectively in 2014 and 2015.

　　In parallel with the overall slowdown, somepositive changes have occurred in the composition of China ’s economic growth. First ofall, the relationship among growth in the primary, secondary and tertiaryindustries is better aligned, contributing to a healthier economic structure.Traditionally, China ’ssecondary industry had been growing faster than the tertiary industry since1978. Yet in the context of slowdown, growth of the secondary industry fell bya much larger margin; in 2014, contribution by the tertiary industry to GDPgrowth exceeded 50% for the first time, and the tertiary industry thus became amajor engine of growth. Secondly, regional growth and particularly growth among China ’seastern, central and western regions became more balanced. As can be seen fromthe decomposition of GDP growth contribution by region shown in Figure 1[2],the slowdown first struck China ’seastern region and persisted thereafter. On the other hand, thanks to a host ofregional development strategies introduced by the Chinese government, thegrowth rates and contribution of China ’s central and western regionscontinuously increased since 2000, thus narrowing the regional gaps. However, theslowdown in China ’s centraland western regions in 2012 was a key factor behind China ’s slowdown to below 8%.