The conversion of old and new kinetic energy has been mentioned in two consecutive important meetings recently.

The symposium of economic situation experts and entrepreneurs held by the Premier on July 13th proposed to promote the smooth transition of new and old driving forces; The Politburo meeting of the Communist Party of China Central Committee held on July 30th stated the need to accelerate the transformation of old and new driving forces. The transformation of old and new driving forces "is an important term in China's economic policy, which frequently appeared in top-level documents during the supply side structural reform period in 2016. Why is the "transformation of old and new kinetic energy" appearing frequently again in important conferences? What signals are released? What impact may it have on subsequent economic policies?

On August 11th, the Economic Observer interviewed Luo Zhiheng, Chief Economist of Yuekai Securities, regarding the aforementioned issues. He believes that the successive emphasis on the transformation of old and new driving forces in important meetings reflects that the transformation of old and new driving forces has become an important mainline for observing the current economic situation in China, deploying macro policies, and planning for medium - and long-term development.

Luo Zhiheng told the Economic Observer that an important lesson from the past decade is that economic transformation requires both advance planning and patience. Many of the new industries and advantages we see today come from cultivation ten years ago or even earlier; The artificial intelligence, advanced manufacturing, and future industries that are being laid out today also require time to grow. The transformation of old and new driving forces is essentially a long-term relay process, with the key being to continuously strengthen new driving forces while promoting their better transformation into productivity, employment, household income, and domestic demand, ultimately achieving effective continuation of traditional growth drivers.

|Dialogue|

Economic Observer: Recently, several important meetings have mentioned the transformation of old and new driving forces. What does this mean?

Luo Zhiheng:The successive emphasis on the transformation of old and new driving forces in important meetings reflects that the transformation of old and new driving forces has become an important mainline for observing the current economic situation in China, deploying macro policies, and planning for medium - and long-term development.

Firstly, the driving force of China's economic growth is undergoing profound changes. With the comprehensive shift of the economy towards high-quality development, the previous model of relying mainly on real estate, traditional infrastructure construction, resource input, and low-cost processing and export to drive growth has gradually weakened its marginal effects. Future economic growth needs to rely more on technological progress, industrial upgrading, digital and green transformation, and new demand expansion, continuously improving total factor productivity.

Secondly, new driving forces have grown from local industry highlights to important supports for economic growth. By 2025, the added value of China's "three new economies" with new industries, new formats, and new business models as the main content will account for 18.4% of GDP, reflecting the continuous expansion of the scale and influence of new driving forces. However, it should also be noted that the new driving force has not yet formed a comprehensive dominant position in terms of economic output, employment absorption, resident income, corporate profits, and fiscal taxation, and still needs to be further strengthened.

Again, the transformation of old and new driving forces is not simply about "replacing old with new", but about simultaneously cultivating new driving forces and updating old ones. On the one hand, we need to accelerate the cultivation and growth of emerging and future industries, promote the transformation and industrialization of scientific and technological achievements, and gradually transform new driving forces into stable market demand, enterprise profits, employment opportunities, and fiscal revenue; On the other hand, we need to promote the revitalization of traditional industries through technological transformation, digital transformation, and green upgrading. At the same time, we should reasonably grasp the adjustment pace of real estate, infrastructure construction, and traditional industries to prevent the rapid decline of old driving forces from impacting investment, employment, local finance, and financial stability.

Economic Observer: What is the importance of promoting the transformation of old and new driving forces for the current Chinese economy?

Luo Zhiheng:The current Chinese economy is in a critical period of rapid growth of new driving forces and deep adjustment of old driving forces. Whether the two can achieve a smooth connection directly affects economic growth, employment, finance, and the development foundation during the 15th Five Year Plan period.

Firstly, the structural differentiation of the current economic operation is becoming increasingly evident. On the one hand, emerging industries such as new energy vehicles, artificial intelligence, integrated circuits, digital economy, and high-end equipment are growing rapidly; On the other hand, real estate, traditional infrastructure construction, and some heavy chemical industries are still undergoing adjustments. As a result, emerging industries have shown strong performance, traditional sectors continue to face pressure, and the overall economic output is stable but the internal structure is clearly differentiated. Therefore, judging the economic situation should not only focus on GDP growth rate or the high-speed growth of a few emerging industries, but also pay attention to the scale, growth rate, and impact on investment, consumption, and employment of both new and old driving forces.

Secondly, the adjustment of old kinetic energy has a strong macro transmission effect. Real estate, infrastructure construction, and traditional manufacturing industries are not only relatively large in scale, but also widely related to building materials, financial credit, local finance, resident assets, and employment. The demand gap and risk pressure formed by the adjustment of old driving forces are difficult to be fully filled by some emerging industries in the short term.

Thirdly, new driving forces are growing rapidly, but the transformation from industrial growth to macro support still requires a process. The current new driving forces have shown strong competitiveness in production, investment, and exports, but some emerging industries have high capital and technology intensity, and their output growth does not necessarily translate into large-scale employment, household income, corporate profits, and fiscal revenue. Only by further connecting the transmission chain between technology research and development, industrial application, market demand, enterprise profitability, and employment growth can new driving forces truly grow into stable macroeconomic pillars.

Fourthly, the increasing uncertainty of the external environment has put forward higher requirements for enhancing endogenous growth momentum. In the face of slowing global economic growth, rising trade protectionism, and accelerating adjustments in industrial and supply chains, China needs to reduce its excessive dependence on external demand and traditional factor inputs, and form a more independent, sustainable, and secure growth momentum through technological innovation, expanding domestic demand, and industrial upgrading. Therefore, the transformation of old and new driving forces is not only related to economic growth, but also to industrial security, economic resilience, and international competitiveness.

Fifth, it is necessary to clarify the new growth support system as soon as possible at the beginning of the 15th Five Year Plan. 2026 is the starting year of the 15th Five Year Plan. Whether the new and old driving forces can be smoothly continued directly affects the potential economic growth rate, modern industrial system construction, employment stability, and local fiscal sustainability in the future period. Therefore, policies should not only prevent the rapid adjustment of old driving forces and the overlapping of risks in multiple fields, but also prevent the occurrence of redundant construction, low-level competition, and capacity expansion that deviates from real demand in the process of cultivating new driving forces.

Economic Observer: How to define what is old momentum and what is new momentum? What is the core division scale between the two? Can it be classified simply by industry track?

Luo Zhiheng:The difference between old and new driving forces is not in the industry, but in what drives growth. On the supply side, it depends on where the growth momentum comes from: new driving forces rely on the improvement of total factor productivity brought about by technological progress, while old driving forces mainly rely on the scale expansion of capital, labor and other factor inputs; In terms of demand, it depends on where the growth space comes from: new driving forces are connected to new demands with rapidly increasing penetration rates and continuously opening market capacity, while old driving forces are facing traditional demands that tend to be saturated and mainly rely on stock updates. According to this standard, there may also be both new and old kinetic energy within the same industry: in the steel industry, high-grade non oriented silicon steel used for new energy vehicle drive motors, high-temperature alloys used for aerospace, etc., belong to new kinetic energy; However, ordinary building steel represented by threaded steel belongs to the category of old kinetic energy.

The new energy industry mainly refers to industries that rely on technological progress and new demand expansion to achieve growth. It usually has the characteristics of high technological content, high R&D investment, strong industrial driving ability, and large market growth space. Specifically, high-tech industries (high-tech manufacturing and high-tech service industries) can serve as the core, with strategic emerging industries as important supplements. Typical industries include new energy vehicles, artificial intelligence, biomedicine, high-end equipment, and new materials.

The old energy industry mainly refers to the traditional growth chain that used to support high-speed economic growth for a long time, but now demand is gradually approaching saturation, and growth relies more on investment expansion, resource investment, and low-cost advantages. Specifically, it mainly includes real estate, infrastructure construction, resource and energy, heavy chemical industry, as well as traditional export processing industries. Typical industries include real estate, construction, coal, steel, cement, as well as labor-intensive processing and manufacturing industries such as textiles and clothing.

Economic Observer: Ten years ago, during the period of promoting supply side structural reform, the concept of "transformation of old and new driving forces" was proposed. How do you evaluate the actual impact of the "new driving forces" cultivated at that time, which ones met expectations and which ones fell short of expectations?

Luo Zhiheng:Overall, ten years ago, the country had a strong foresight in the early layout of "new kinetic energy". The cultivation of new driving forces is not achieved overnight. From technological breakthroughs and industrialization to the formation of scale advantages, it often takes a long period of time. Currently, China has formed strong competitiveness in the fields of new energy industry and intelligent manufacturing, largely due to the sustained layout and policy cultivation ten years ago or even earlier. Some of the 'seeds' planted back then have now grown into important forces supporting economic development and industrial upgrading.

From the actual results, some areas have already achieved good results or even exceeded expectations at that time. Internet and digital technology have profoundly changed the mode of consumption, payment, logistics, production and social operation; Strategic emerging industries such as new energy vehicles, lithium batteries, and photovoltaics have entered the stage of large-scale and global development from early cultivation, and have formed relatively complete industrial chains and international competitive advantages.

However, it should also be noted that there are still some shortcomings in the current development of new driving forces. Some strategic emerging industries have formed strong competitive advantages, but key core technologies, basic software, high-end manufacturing and other fields still need further breakthroughs; Some new technologies and industries are still in the investment and growth stages, requiring a longer period of time from technological breakthroughs to industrialization, scale, and stable growth contributions.

Looking back, an important lesson from the past decade is that economic transformation requires both advance planning and patience. Many of the new industries and advantages that can be seen today come from cultivation ten years ago or even earlier; The artificial intelligence, advanced manufacturing, and future industries that are being laid out today also require time to grow. The transformation of old and new driving forces is essentially a long-term relay process, with the key being to continuously strengthen new driving forces while promoting their better transformation into productivity, employment, household income, and domestic demand, ultimately achieving effective continuation of traditional growth drivers.

Economic Observer: What lessons can we learn from the previous round of cultivating new momentum? What role should local governments play in promoting the transformation of old and new driving forces?

Luo Zhiheng:In the past, local governments relied heavily on policy tools such as tax incentives, fiscal refunds, and industrial funds to attract investment. While they did play a role in accelerating capital and industrial agglomeration at specific stages of development, they also easily led to policy arbitrage, redundant construction, and homogeneous competition between regions. With the continuous improvement of national unified market construction, fair competition review and other systems, as well as the strengthening of local financial constraints, the development mode that relied mainly on preferential policies to attract projects in the past is becoming increasingly unsustainable. The way local governments promote industrial development needs to be transformed accordingly.

The role of local governments should shift from directly providing incentives and allocating resources to creating a development environment, improving public services, and cultivating industrial ecology. One is to continuously improve the business and legal environment, enhance policy stability, transparency, and government service efficiency, and reduce institutional transaction costs for enterprises; Second, focusing on the local industrial foundation, we will complement the weak points of public infrastructure and public services, including transportation, energy, computing, industrial Internet, as well as pilot scale testing, testing and certification, and public technology platforms; The third is to promote collaboration between universities, research institutions, financial institutions, and enterprises, and to bridge the barriers between technology research and development, achievement transformation, and industrialization; The fourth is to provide early validation and market opportunities for new technologies and products through open application scenarios, public data, and government procurement. The competition between regions should also be more reflected in the competition of comprehensive business environment, public services, and industrial ecology.

Policy tools such as industrial funds can still play a role, but they need to highlight marketization, specialization, and long-term development, with a focus on supporting technological innovation, early-stage projects, and weak links in industries that are difficult to fully cover by market mechanisms, in order to avoid being transformed into investment rebate tools. Localities should also form comparative advantages based on their own resource endowments, industrial foundations, and talent conditions. They should adapt to local conditions rather than rushing forward, reducing the pursuit of hotspots and repetitive layouts.

Economic Observer: In this round of transition between new and old driving forces, AI (artificial intelligence) is highly anticipated. Is AI the "engine" of new kinetic energy, or is it more of a "transformation tool" that empowers the upgrading of old kinetic energy? In your opinion, the driving force of AI on China's economic growth is more likely to be reflected in which aspect: creating new industries and employment, or improving the production efficiency of existing industries?

Luo ZhihengAI can be an important "engine" for cultivating new driving forces, as well as an important technological tool for promoting the transformation and upgrading of existing industries, and the two are not contradictory. As a new industry field, AI itself will drive a series of new industries and formats such as chips, computing power, basic models, software, intelligent terminals, embodied intelligence, etc., forming new investment, consumption, and employment demands. But from a broader economic perspective, the significance of AI lies in its universal technological attributes, which can enter various links such as research and development design, production and manufacturing, supply chain management, marketing services, and enterprise management, thereby improving the operational efficiency of the entire economic system.

For China, the driving force of AI on economic growth in the coming period may first be more reflected in empowering existing industries and improving productivity. China has a large-scale and complete industrial system with diverse application scenarios, which provides an important foundation for AI to move from technological breakthroughs to large-scale industrial applications. Especially in the manufacturing industry, if AI can truly shorten the research and development cycle, improve the yield rate, reduce energy consumption, optimize equipment operation and inventory management, its productivity effect may far exceed the added value directly created by the AI industry itself.

Productivity improvement and the formation of new industries are not two separate processes. In the early days of the Internet, it was also reflected in the improvement of information and transaction efficiency, and then gradually formed new industrial forms such as e-commerce, mobile payment and platform economy. AI may also undergo a similar process: first embedding itself as a technological tool into existing industries, continuously forming new products, business models, and industrial divisions in large-scale applications, and further giving rise to new industries, new professions, and new demands that are currently difficult to fully foresee. Employment is also more likely to manifest as a systemic reshaping, with some repetitive positions being affected, while new positions are generated around AI development, application, operation and maintenance, as well as the integration of the "AI+industry", which puts forward new requirements for workers' skills.

Therefore, to measure whether AI can become a true new driving force, we cannot only look at the number of AI companies, models, or industry scale. More importantly, we need to see whether it can widely penetrate into the real economy, continuously bring about productivity improvement and business model innovation. For the Chinese economy, the greater potential value of AI lies in driving technological transformation and efficiency leaps in a large number of existing industries, while continuously nurturing new industries, new demands, and new growth opportunities in this process.

Economic Observer: Where is the biggest risk point of this round of new and old kinetic energy conversion? Is it due to technological breakthroughs falling short of expectations, the rapid exit of old drivers leading to a halt in growth, or social transformation costs (employment, income differentiation) exceeding affordability? If we use a time frame to judge, how long do you think it will take for this round of transformation to see the substantial takeover of new momentum?

Luo ZhihengThe biggest risk of this round of new and old kinetic energy conversion may not be a single factor, but rather the mismatch in the conversion speed of different links, resulting in downward pressure on the phased economic growth rate. It takes a long time for new driving forces to progress from technological breakthroughs to industrialization and scale, and then to form stable growth contributions; At the same time, traditional driving forces such as real estate have entered a stage of adjustment. If traditional driving forces adjust quickly while new driving forces have not yet formed sufficient scale and driving force, there may be a temporary lack of growth momentum. Therefore, the key is to grasp the pace of transformation, while promoting structural adjustment, leaving necessary time and space for the growth of new driving forces.

In the medium to long term, the greater challenge is whether technological progress can truly translate into productivity, employment, and income growth. The fields of artificial intelligence, new energy, and advanced manufacturing have great potential, but from technological breakthroughs to large-scale commercial applications, they still need to go through multiple stages such as cost reduction, infrastructure improvement, talent cultivation, market expansion, and mature business models. At the same time, industrial transformation will change the employment structure and skill demand, with some traditional positions decreasing and new positions requiring higher skills. If labor transfer, vocational education, and retraining cannot keep up in a timely manner, it may increase structural pressure on employment and income.

Therefore, the transformation of old and new driving forces requires not only improving the growth rate of the "new", but also grasping the adjustment rhythm of the "old", while enhancing the adaptability of employment, social security, and human resources policies. A truly successful transformation should not only involve a change in the source of GDP growth, but also be demonstrated by new industries and production methods that can continuously create investment opportunities, employment, and household income, and drive productivity improvement and domestic demand expansion, thereby forming a more stable new growth mechanism.

In terms of time, this round of transition still requires sufficient patience. In the next 3-5 years, we can focus on observing whether the contribution of new driving forces in production, investment, employment, and residents' income continues to increase; If technological progress, industrial upgrading, and related reforms can be smoothly promoted, in about 5-10 years, new driving forces are expected to form a more stable and dominant support in economic growth.