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Aug 10, 2016
Why Do We Need NEI?
Professor from School of National Development of Peking University
Chief Advisor of MasterCard Caixin BBD China New Economy Index
1. The Constructive Background of NEI
Since the reform and opening up policy, Chinese economy has witnessed rapid development and gained global attention. However, in recent years, the new norm of Chinese economy development has entered a slowing down process from its rapid growth. As a result, lower capital returns, the raising cost of labour caused by demographic dividend, and the aging population start to appear. Meanwhile, since the financial crisis in 2008, the foreign demand has been weak therefore the export-oriented economy has been facing significant challenges. More and more evidence proves that with the same unit of labour and capital, today’s efficiency of productivity (also known as the total factor productivity) is decreasing. The old developing mode replying majorly on cheap labour and the cost of environment is deemed unsustainable. A series of reforms and changes are needed to bring about new economic development, so as to realise the smooth transition from the economic growth mode of high speed and low quality towards high speed and high quality.
The transition that China faces is not unprecedented. In the early 1970s, America had experienced a situation where the growth mode of its traditional manufacturing was unsustainable, and its total factor productivity was decelerating. During 1972 to 1996, the average growth rate of its total factor productivity is 0.56, which is much lower the number 1.6, that of the years from 1913 to 1972. With the technological advance of computers and internet, United States had successfully countered the bottle neck period and realized the economic transition from manufacture towards service. Through this transition, high quality human resource and innovation was the key.
From this international experience, it can be concluded that although Chinese economy is facing a challenge, it has a great potential to transform towards a high quality economic growth model. It should be noted that Chinese labour quality has been improving. According to the Census Bulletins, in these 28 years from 1982 to 2010, the portion of population with a high school education had risen from 7.03% to 22.96%. The college-educated population grew faster, from 0.83% to 9.83%. Illiteracy and functional illiteracy of the population fell from 22.85% to 4.08%. From the perspective of practical innovation, the transition from “made in China” to “created in China” has started. Since 2011, China is the country which has the largest amount of patent application in the world for five consecutive years. From 1985 to 2014, the average growth rate of patent applications is 18.3% and that of 2010 to 2014 is 24%. It is worth addressing that corporate patents accounted for 16% in 1985, and increased to 49% in 2009. As for patent for invention, it has taken more than 50% of the application in 2005 and it reached 75% in 2009. It has become the principle part for innovation.
Admittedly, in order to assess whether Chinese economic structural transformation is smooth, a clear understanding of the development of innovation-driven new economy in China is needed. However, due to the lack of clarity on the definition of “new economy”, the existing official statistics have a better record of the downturn of China’s traditional economy but have no sufficient record of the growth of new economy. It calls for a new indicator to measure and track changes in the growth of the new economy. MasterCard Caixin BBD China New Economy Index (will be referred to as NEI from now on), a joint effort by the School of National Development of Peking University and Caixin Insight Group, will more accurately grasp the development status quo and provide new perspectives of Chinese economy.
2. The Essence of the New Economy
In order to evaluate the new economy, we need to explore the essence of it. The following criteria are used to standardize the industries which qualify as a component of new economy:
1) High input for human capital and technology, which means that the total of remuneration of labour and business surplus should account for more than 70%. The average education of the labour should exceed 12 years. The industries should have an emphasis on research development. Light assets refer to the industries which have lower fixed assets.
2) Industries which have the potential of sustainable and rapid development.
3) Industries which have promising developing scenarios. The industries we screened have received governmental support (to name a few: General Office of the State Council’s Guidance on Developing High-Technological Service Industry, State Council’s Decision on Speeding up the Cultivation and Development of Emerging Industries of Strategic Importance, China’s Manufacture 2025.). They also qualify as emerging industries on a global scale.
According to this standard, the current new economy industries include 9 major categories: energy conservation and environmental protection, new-generation information technology and information services (new IT), new energy, advanced materials, new energy vehicles, science research and high-tech services, biomedical science, finance and legal services, advanced equipment manufacturing. It has 111 subcategories coded by 4 digit numbers. Notably, since we are focusing on differentiating the traditional and the new from the perspective of input, traditional industries which adopt large-scale renovation and turn into ones with high labour capital and high-tech also qualify as the new economy. This standard also incorporates new sectors of economy which have not yet occurred but likely to be in the future.
3. The Methodology of the Construction of NEI
In the process of building NEI, we started from the status quo of China, and referred the report index system of State New Economy Index, Silicon Valley Index, among many world-known new economy and innovation index systems. Therefore, NEI shared some similarities with other international indexes, but this innovation indicator system is mainly made to reflect China’s situation. The aim is to evaluate the proportion GDP that the new economy takes. It has three main primary inputs, namely high level labour input, high quality capital input and technology and innovation, which accordingly reflect labour, capital and technology. NEI also has 11 secondary indexes.
Due to the fact we cannot yet to acquire direct assessment on the new economy on the aspects of labour, capital and technology from the public accessible datasets, NEI is based on open data. By March 2016, NEI had taken in more than 52 million recruitment posts, 2.7 million enterprise registry records, 3.76 million tender/bidding records, 28,000 venture investment records, 5000 third board listing records, 5.8 million patent application records, 300,000 patent transfer records, as well as real time data used to calculate urban population flows from railway tickets and flight traffic etc.
In the process of constructing NEI, we put emphasis on how much the new economy contributes whenever one-yuan worth of GDP is made. According to the equation of production, it can be seen that the portion of the new economy GDP against the total GDP can be estimated if the portion of inputs from labour, capital and technology can be specified.
From its debut h on 2nd of March 2016, NEI updates its monthly reading at 10am on every 2nd of the month. NEI started in August 2015, and after a year of trial running and adjustment, the official version will be launched in March 2017.
4. The Development of the New Economy
NEI is for us to understand the status quo of the development of the new economy and it provides new insights into related policy adjustment. First of all, in aggregate, we can see that output from the new economy accounts one-third of the total output. In June 2016, the reading of NEI was 30.8, which represented the percentage that the new economy accounted in comparison with the whole economy. Comparing the figure in May, 30.1%, a 0.7% increase was noted. 30.8 was also the third highest score since August 2015. It is estimated that according to the current growth rate, about one-third of the new economy industries will remain a double-digit growth; whereas another one-third of the economy has entered or is approximating the recession. These industries mainly belong to traditional or old economy, centering on the upstream of manufacturing, real estate and exports; the other one-third of the economy will remain a one-digit growth rate. These industries are mainly the middle and lower stream of manufacturing, and part of consuming and service industries.
Secondly, from the relationship between the new and traditional economies, NEI reflects that the increase in the amount of the new economy industries cannot yet fully offset the reduction of downward adjustment of the traditional economy and the new economy cannot bear the responsibility of stable growth on its own. Among the industries of the new economy, advanced equipment manufacturing, biomedical science, energy conservation and environment protection and new energy have shorter industry chain, and they have a limited spill-over effect on the secondary traditional industries such as steel, cement, and petrochemicals. In addition, the new economy industries are comparatively speaking intensive in terms of human capital. Their growth will gradually improve the employment of people of higher human capital, but it cannot fully offset the decline in employment as the result from adjustment of traditional industries. However, it should be noted that in the decline of the old economy, strengthening the skill training for the employees of the traditional industries can promote the transfer of job positions and re-employment, so as to ease the pressure of unemployment from the structural adjustment.
Lastly, from the policy-making point of view, there should be more support for the new economy. The new economy is, to a great extent, an exploration to new business forms and norms, in which market should be allowed to play a decisive role. “Seize the new and release the outdated” will be the keynote of the policy in the future. Only when the new economy collects power can the old economy have the time and space to adjust itself. What is more, statistical work on the new economy need to be fortified. In the process of economic structural transformation, policy makers should guide investor to focus on the growth quality rather than quantity. Improvement on transparency can boost the market’s confidence on economic transformation.