Karlis Smits: the slowdown of economic growth in China is a natural transformation

Karlis Smits, a senior economist with World Bank, has been based in China since 2013. He is the main author of China Economic Update, East Asia and Pacific economic update and etc. Right after the World Economic Forum, Karlis Smits joined an interview with GMW.cn to share his views on the slowdown of China’s economic growth and the prospect of transformation.

GMW.cn: There has been a long connection between China and the World Economic Forum. But it is still not common for Chinese Premier to visit it in person. In 2009, Wen Jiabao, Chinese former Premier visited Davos, with the 4-trillion-yuan stimulus plan ensuing. 2015 is a year of further reform. Premier Li Keqiang visits the World Economic Forum. Why does China frequently send high-level delegations to Davos at crucial junctures?

Karlis Smits: China currently is the second largest economy in the world. In 2014, it has passed ten trillion dollars. So there is a global interest in what is happening in China, what is happening with this reform process. As you all know, at the end of 2013, China unveiled a very ambitious reform plan that has already started to implement in 2014.So 2015 is going to be very critical for that reform implementation. There are a lot of interest in what intentions the government has and the plans on what is going to happen to the economy and what are going to be reform priorities, because that have not only domestic implications on China and global implications, because China, as I have mentioned, is the second largest economy and the largest trading partner in the world. So, obviously there is an interest in what is going on in China.

GMW.cn: The World Bank forecasted that China would see its growth rate further down from 7.4 percent in 2014 to 7.1 percent this year, the lowest in more than two decades. What do you think of the slowdown of Chinese economic growth?

Karlis Smits: We see the slowdown of the economic growth as a transformation of China’s economic model. Its transitioning is the so-called “New Normal”. So lower growth is an inevitable part of that “New Normal”, because the growth model is transitioning from a capital-intensive and investment-led growth model based on manufacturing towards a growth model which is more balanced, consumption-led and based on the demand side. Also, innovation is taking a more central role.So lower growth rate is an inevitable part of that. But they also have to recognize there is a percentage growth in terms of absolute numbers. China, every year will grow much more in terms of dollar of new economic activity generated that was ten years ago when China was growing at a ten percent, for example. So we do not see this as an alarming development, it is a natural transformation as China’s economy is becoming larger and more sophisticated.

GMW.cn: What is its impact on the world economy?

Karlis Smits: China currently is one of the engines of economic growth and obviously slowdown in growth in China will also have implications for other countries. It will have implications on major trading partners. Also, it would have implications, given that China’s economic structure is changing, because also, this is one of the largest markets for exporting products. As Chinese economy is becoming more sophisticated, it will attract more sophisticated products from outside world. So there is also that challenge which is quite important.

GMW.cn: Some Chinese experts comment that China is on the way of transforming itself from the world factory to an exporter of capital and ideas. Do you agree with this? How would you evaluate China’s efforts on transformation?

Karlis Smits: Yes, we agree with that notion and we also mention that China’s next transformation is from the so-called “Made in China” to “Innovated in China”. And the next transformation is more complex, to engineering, because it would also be driven by more innovations. Innovation is more difficult to support from the top-down. The innovation is typically supported by the small-and-medium sized enterprises that will become an engine of growth. We have seen that the government has been very proactive in understanding these new growth drivers being innovation. And there have been a lot of efforts in supporting these small-and-medium sized enterprises. We already saw in last year, lowering some of the registrations of capital for small-and-medium sized enterprises. That result in a significant increase, because a lot of great ideas, big cooperation started with the small-and-medium sized enterprises.  For example, Alibaba was also once a small-and-medium sized enterprise. So the key message there is the next innovation would start from small-and-medium sized enterprises in China. And there the business environment is crucial in nurturing these small-and-medium sized enterprises.

GMW.cn: China is in the transitional period now, with outdated growth points fading away and new ones incubated. What new growth points will you highlight for China’s economic development in 2015?

Karlis Smits: We want to stress that the growth point we have to rely more on creativity, as I mentioned, small-and-medium sized enterprise is one of that potential growth point, because they are very flexible, very adaptable to the changing of environment. The second important growth driver is also the demand side. You have to be supported more by consumption, rather than by investment. And we have seen that China’s middle class is growing very rapidly. We see that the consumption is growing by more than ten percent every year. So that is also supporting growth and demand side. So we see that these factors will play an important role going forward, including in 2015.

 

By Zheng Yi and Yu Chaoran From GMW.cn (Guangming Online)

Karlis Smits
World Bank Senior Economist

Karlis Smits, a senior economist, has worked at the World Bank since 2006. Since 2013 Karlis Smits is based in China. Prior to joining the World Bank, Karlis worked at the Ministry of Economy in Latvia on a broad set of economic policy issues.He is the main author of China economic update.More>>

  • "Innovation is more difficult to support from the top-down. The innovation is typically supported by the small-and-medium sized enterprises that will become an engine of growth. We have seen that the government has been very proactive in understanding these new growth drivers being innovation."
  • "So we do not see this as an alarming development, it is a natural transformation as China’s economy is becoming larger and more sophisticated."
  • "Lower growth is an inevitable part of that “New Normal”, because the growth model is transitioning from a capital-intensive and investment-led growth model based on manufacturing towards a growth model which is more balanced, consumption-led and based on the demand side."
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