The Chinese economy has embarked on the transition from being manufacturing-driven to being services-led, which has been reflected in the upgrade of consumption and industrial structure as well as the evolving urban structure. The transformation is posing great challenges to the traditional economic model and policy thinking. At this stage, it is critical to stabilize aggregate demand with proactive monetary policies.
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· The Chinese economy has fully entered a period of structural transformation from a manufacturing-driven model to a services-led one since 2012, whether in terms of nominal and real manufacturing value added (MVA) as a proportion of GDP, the share of manufacturing employment, or in terms of the share of manufacturing product consumption.
· There has been no premature deindustrialization in China. Judged against high-income economies in similar stage of development, during the transformation from a manufacturing-driven to a services-led economy, the level of per capita income in China, the peak value of the share of MVA, as well as the magnitude of the decline in the share of MVA in the decade since the start of structural transformation are in line with the general experience of developed countries.
· The upgrade in consumption and manufacturing, both of which are becoming more services-led rather than manufacturing-driven, is the driving force behind the economic transformation in general.
· Traditional manufacturing faces greater pressure of “survival of the fittest” and is forced to transform and upgrade. The transformation and upgrading of the manufacturing industry is driven by the flourishing human capital-intensive services, which is also a premise for consumption upgrade.
· The structural transformation from a manufacturing-driven to a services-led economy is a chain reaction. Consumption upgrade results in industrial upgrade, with the development of human capital-intensive service industry picking up pace. The structural transformation has also accelerated the evolution of urban morphology from urbanization to metropolitanization, pushed up consumption rates, pared down investment rates, slowed the growth in the share of the export market as well as economic growth, and leading to a macroeconomy that is “easy to cool and hard to heat”.
· There remain issues that need to be reflected upon, including the real weaknesses of the Chinese economy, popular prejudices, and the 4-trillion-yuan stimulus program.