The long-term trend of economic growth and quantitative characteristics of the economic “new normal” in China
【Abstract】Summary: Recent data show that the Chinese GDP growth rate declined continually from 10.6%in 2010 to 7.3%in2014.Thus, determining the source of the decline, how to stop the decline and the stable interval of the growth rate are important, realistic, theoretical issues. Based on the reality of the “new normal” of the Chinese economy, we would like to provide empirical evidence on these issues. This paper specifies a macroeconomic cointegrated system that consists of gross domestic product (GDP), consumption, investment and net export; transforms the reduced vector error correction model (VECM) of the cointegrated system into a structural VECM (SVECM) ;and then transforms the SVECM into a structural MA (SMA) , which includes information about cointegration. Finally, we identify the long-and short-run impacts of shocks and decompose Chinese GDP into the long-term trend and transitory components. The theory of identification and decomposition via the SVECM is the common trend theory for a cointegrated system (Stock and Watson, 1988; King et al., 1991). It demonstrates that if the cointegrated system has n cointegrated I (1) variables with cointegration rank r, then the cointegrated system has n-r common trends. King et al. (1991) prove that the n-r common trends originate from n-r permanent shocks, and that the remaining r shocks are transitory shocks. Permanent shocks such as technical progress and institutional change in economic growth have permanent effects on GDP. Transitory shocks such as changes in nominal money and expectation have transitory effects on the GDP growth rate. Following the definition of Blanchard and Fisher (1989), the permanent shocks form the long-term trend, whereas the transitory shocks form the transitory components. Applying the preceding economic and econometric theory, this study decomposes Chinese GDP into the long-term trend and transitory components. We also study the evolution of the long-term trend and transitory components, make inferences about the stable interval of the GDP growth rate based on this evolution and demonstrate the quantitative characteristics of China’s economic “new normal.” The main conclusions are stated as follows. First, the long-term trend of Chinese GDP is shifting downward; its average growth rate declined from 9.88%in 2001—2009 to 7.85%in 2010—2014.In 2014, the growth rate of the GDP trend was only 7.6%.The transitory component has also moved downward since 2013, declining by 0.55 percentage points in 2014.Thus, the decline in the long-term trend and transitory components are the sources of the continual decline in Chinese GDP growth rate. It is time that China’s economy opened a period of “new normal”. Second, the decline in the long-term trend is consistent with the changes in the long-term growth factors and relevant theories. China’s economy is suffering from “structural deceleration,” the restriction of energy conservation and emission reductions, the decline in physical and human capital growth rates and the decrease in demographic dividends, which are long-term growth factors in supply-side economic theory. So, the decline in the long-term trend is consistent with the changes in the long-term growth factors, which imply a certain degree of weak supply in the Chinese economy and can be regarded partly as evidence for the supply-side reform. Third, by studying the evolution of the long-term trend and transitory components, this paper makes an inference and concludes that the GDP growth rate will be stable within the range of 6%—7.5%with a probability of 91.5%, and that the growth rate of the long-term trend is between 5.5%and 7.5%.These results demonstrate the quantitative characteristics of the “new normal.” Fourth, the policy implication of the quantitative characteristics of the “new normal” is that the macro-management under the “new normal” should focus on promoting the growth of the long-term growth factors via supply-side reform.