Abstract

“Proceeding from this new starting point, we will steadfastly deepen reform in an all-round way and open up brighter prospects of development. China’s economic development has entered a new normal, a stage it cannot bypass if China is to upgrade its economy and make it better structured. Reform is crucial to maintaining medium-high rate of growth under the new normal. Sticking to convention will get us nowhere. Fear to advance will only result in losing the opportunity. China’s goal of reform has been set and we will not deviate from it. China will take sure and firm steps in advancing reform and will not slow down its pace.”
                                                                                                                                                                                                                              --Xi Jinping, opening address, G20 Leaders Summit, Hangzhou

President Xi Jinping of China has emphasized in recent statements that China’s development has entered a “new normal.” The phrase signifies not just that the GDP growth rate has naturally slowed down at this stage, but that China faces new challenges to maintain a healthy growth rate. This paper examines the new macroeconomic normal for China. The next section examines the key characteristics of China’s recent growth path. The third section argues that, on the current path, risks are building up that threaten a financial crisis and/or exchange rate crisis. For a variety of reasons China may not have big, visible crises, but not addressing the risks is likely to lead to an excessive slowdown in growth. The fourth section delineates policy options in the areas of monetary, fiscal, state enterprise, and trade and investment openness – options that together could help China adapt to the new normal and continue to grow well for some decades. Section 5 concludes.