Beyond the pessimism: Why sustained, healthy development will be the new normal for China’s economy

In the first week of 2016, the Shanghai stock market welcomed in the new year by twice triggering the recently implemented circuit breaker mechanism, a regulatory tool designed to calm tumbling markets. On the first trading day of the second week, the market continued to plunge, this time by more than 5 per cent. The bad news from China’s stock market not only made headlines in the world’s major financial media, it also led to declines in almost all the major markets around the world. The panic among global investors is even more serious.

So, how should we react to such a critical situation? How will the Chinese economy develop?

First, although the economy will continue to face downward pressure in 2016, it is important to understand that it is at a historical developmental stage of transition, shifting from rapid to moderate growth. During this transition, unusual events will inevitably occur. Many who are pessimistic about the future of the Chinese economy do not fully understand the laws of economic growth during periods of adjustment, nor are they aware of the bigger trends.

READ MORE: Deflationary pressures to continue ‘haunting China’s economy’ this year: economists

It should be expected that double-digit growth will become a thing of the past, given that, for instance, large-scale infrastructure construction has matured, the real estate market is saturated and even oversupplied, and the economy has entered an era of post-industrialisation. A slowdown in growth rates is an inevitable part of the development process.

Second, the economy is no longer in need of double-digit growth; the almost 40 years of sustained high-speed economic development since the reform and opening up period has led it to a stage where it is due for a transformation. In the past few years, economic development has been too fast, overheating the general economy and bringing about great challenges such as serious environmental degradation, increasing social conflict, international pressure, and so on.

At the same time, the country’s environment, resources, labour and land cannot continue to bear the weight of such a massive and crude expansion. Thus, an economic transformation and upgrade is unavoidable.

Third, historical experience and the laws of development have determined that the Chinese economy must slow down; more importantly, the central government clearly understands these laws and uses them to its advantage when outlining relevant policies and regulations, so it is almost certain that the economy will enter a “new normal” situation.

READ MORE: Stock market regulators in China must fine-tune circuit breaker to avoid repeat of ‘Black Monday’