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Miracle of China’s Quality and Economic Growth

October 9, 2017

The point of view is quoted from Prof. Cheng Hong at“Guo Shi Forum 2017” held by the Counselors’ Office of the State Council. The full text is reproduced as follows:

The past 30 years of reform made China's economic growth miracle into reality. So did China also create a miracle of quality as an important element of total factor productivity? Now the problem is that some do not think China’s quality is good enough, to the extent that economic quality development faces huge problems. This leads to a question: what is the relationship between quality and economic growth? Is it possible that the economy is going well and the quality is not good?

First, theoretically speaking, economic growth mainly depends on GDP growth, which is the sum of national product and market value. Thus, it is impossible to say that Chinese product is poor along with the rapid increase of Chinese economy for decades because poor goods and services will not be constantly purchased by the market. More importantly, what is quality in an open and international trade market? Quality refers to the inherent property to meet the requirement. If quality is equivalent to the inherent characteristics, then the quality standard is as high as possible. However, if quality standard is too high for the customers to afford, that is, it cannot meet the needs of consumers, then the quality is meaningless. Therefore, the fundamental meaning of quality is to meet the requirement while inherent property only serves as means to meet the needs.

With above-mentioned theoretical explanations, we can get a clear answer, that is, macroeconomic growth must be based on the quality of micro-products and services. In other words, behind China's economic boom, there must be the miracle of Chinese quality!

Here is a set of data to show the miracle Chinese quality:

First of all, Chinese product is of great competitiveness in accordance with the international trade evaluation on product quality, whether it is the proportion of total exports of world trade, or the added value of the product. Second, China enjoys leading advantages in terms of the variety of products as a quality evaluation criteria. Third, Chinese product quality was improved quickly as the import of intermediate goods serves as quality standards. China Employer-Employee Survey, initiated by the Institute of Quality Development of Strategy (IQDS) of Wuhan University in cooperation with Stanford University, Hong Kong University of Science and Technology and the Chinese Academy of Social Sciences, is a large scale survey first conducted in developing country. It includes 294 variables of over 1,158 firms and 9103 workers on firm’s characteristics, including not only many firm’s financial variables as shown in the standard accounting sheets but also many variables on product quality, technology innovation and transformation, and human resources. The findings showed that the import of intermediate goods only covered 6.2% among the total investment, reflecting that most of the key technologies and accessory parts were made in China.

The above analysis has shown that China's quality has not only been improved vertically, it has also achieved competitive advantage in the horizontal direction. The reason why people have a misunderstanding towards the miracle of China’s quality lies in the following aspects:

First, simply use the incomplete definition to define China's product quality. In fact, the quality is to meet the needs and the market share of sales is the most important indicator of product quality. Second, simply equate quality with quality management, or even equate it with some quality management system certification. In fact, quality management or certification is just a way to improve quality. It does not mean that quality level is high. Third, simply use international standard instead of consumer demand. We usually fall into a stereotype, believing that the moon must be round in the West, and the quality must be good as well. If we simply use the western evaluation and standards, our product quality will be defined as substandard.    

Therefore, when it comes to the success of Chinese economy, we must explain the success of China's quality. Only by doing so can we have more resolution along with the quality development path with Chinese characteristics.

So what is the quality development path with Chinese characteristics?

1. Driven by quality innovation to meet the multi-level and diversified quality needs

China's quality road focuses on meeting multi-level and diversified market demand, including the so-called low-end (in fact, quality is associated with the price) quality requirements, as well as middle-end and high-end quality needs. We should not stick to the dogma of "better quality", but taking into account of consumer needs so as to produce competitive products of reasonable price. That is why China becomes the largest manufacturing state and trade exporters.

2. Take advantage of comparative advantage of labor costs to implement the method of quality ladder

Quality is determined by production factors. Comparative advantages of different production factors determine the function and position of quality. Over the past three decades, low labor cost remains to be the essential factor superiority of China. In global quality competition, China has given full play to this comparative advantage and achieve quality ladder upgrading through comparative advantages. In early times, we only produce popular consumer goods. With the accumulation of experience and knowledge, we began to produce durable consumer goods and other industrial products including machinery equipment. At present, China's position in the product quality ladder is also increasing. On the whole, China's export product index of technology-intensive industries is slightly higher than that of capital-intensive industries and labor-intensive industries.

3. Entrepreneurs as the leading force to promote the quality to meet the demand of digital times

Enterprise is the main body of quality and the entrepreneur is the leading force of quality. Under the guidance of entrepreneurs, we need to take advantage of the tool of quality control and quality management. At the same time, as we have multi-level and diversified consumer demand data, we could develop customized intelligent mode of different categories and multiple batches. In the intelligent era, this mode will actually be the advantages of Chinese quality development model with Chinese characteristics.

China's reform and opening up over the past four decades not only produced the miracle of Chinese economy, but more importantly, the miracle of the quality. If one does not recognize the miracle of China's quality, one cannot fully explain the miracle of China's economic development. China has unveiled a quality development path with its own characteristics. Although faced with a lot of challenges, the quality reform and innovation is gradually taking place. We can improve and then support the transformation and upgrading of China's economy through consistent improvement and progress.