Editor's note: Yukon Huang is a senior fellow in the Carnegie Asia Program. He served as the World Bank's country director for China. The article was based on the transcript of CGTN's earlier interview with Huang, which reflects the author's opinions and not necessarily the views of CGTN. 

Last year was a major milestone for China. The country's top leadership had emphasized the elimination of absolute poverty by the end of last year. And they achieved the objective.

China's poverty reduction efforts differ from other countries from a geographic or regional aspect. If you go back 10 or 15 years, you will realize that the problem is that in the coastal provinces, incomes per capita were almost three times as much as those in the interior provinces. And the urban areas have much higher incomes than the rural areas. So, the efforts of the last several decades were to invest more in the inner provinces, particularly the far west, and relatively more in rural areas. 

This strategy has been very successful. The growth rates of the interior provinces started to increase faster than the coastal provinces. And the incomes per capita or per household in rural areas have been for periods growing even more rapidly than in the urban areas over the last 10 years. So, the urban-rural gap has narrowed, and the result is that poverty reduction has been effective over the last 10-15 years. 

The issue now is that once you've eliminated national poverty, there is always a segment of the population which is poor because of the business cycles. This is typical of the wealthy countries in the West. They always have a certain percentage of people who are poor. And they are poor because they lost their jobs, due to health reasons or owing to other disadvantages.

The issue for China, as it is for other countries, is that you cannot totally eliminate poverty. There will always be some people who are poorer at a moment in time, whether you are a very wealthy country or a relatively poor country. It's how you deal with these people, or what I call, temporarily poor or disadvantaged. 

This requires special programs. China already has some of these programs. But there needs to be more social programs in the future. The past solution was to invest in the far west or invest in the rural areas. In the future, the issue will be more like unemployment. How do you help the medically handicapped who can't work, and what do you do about the rapidly aging population who have no incomes? And that's a different strategy, and it's a problem that the West is also facing. It's a different one than what China had to deal with in the past.

The leadership has put out the concept of a dual circulation strategy. The dual circulation strategy is what I call a process. It says that growth is going to be affected by domestic factors as well as external factors. If the external environment is not very favorable to growth, in terms of trade restrictions or barriers to foreign investment, then China will need to increase the growth of productivity and depend more on domestic demand, and that means consumption and investment.

A lot of people think the dual focus in terms of domestic demand means promoting consumption, because consumption as a share of the economy is relatively low in China compared with other countries. But this is actually a mistake. Growth is never driven by consumption. Growth is always driven by investment. 

Growth of consumption in China has been increasing by about 7 or 8 percent a year over the past the two decades. That's the highest in the world. In the U.S. and Europe, consumption grows about 1 percent a year. It's not possible for China to increase the growth rate of consumption. Those who argue that consumption should be the focus are misguided.

The real issue is investment. China's investment rate is already very high. So, you cannot increase the growth rate of investment in China. But you need to increase the effectiveness of investment. 

China has been investing between 40-50 percent of its income. That's the highest in the world. But the productivity of that investment has been declining steadily over the last 10 years. It's about half of what it was 10 years ago. That's why China today is growing at 6 percent, not 10 percent. The real issue in the plan is how I can get the productivity, the returns to the investment, higher.

There are lots of things China can do. Some of these are politically related. China's poverty reducing strategy meant increasing more investment in the interior provinces, particularly the far west. The returns to investment in those provinces are only about a half of what it is in the coastal provinces. So, in China, the greater priority to poverty in the far west automatically led to a slower growth rate. The issue today is whether you can afford to continue doing that if growth continues to decline. 

The other issue is urbanization. People are moving everywhere. Priorities have been given to developing smaller and medium-sized cities. But there is a problem in China. Productivity of workers is 50 percent higher in big cities like Beijing, Shanghai and Shenzhen than they are in the smaller cities. If you discourage people from moving into the big cities and encourage them to move into the smaller cities, you also reduce the efficiency of investment. 

So this issue of diverting investment to the interior provinces, encouraging investment in the smaller cities, has led to China's growth rate to fall by about 2 percentage points over the last five to seven years. If you didn't do this, China would be growing at 8 percent a year, not 6 percent. And if you continue doing this, it's going to go down to 5 to 2 percent.

The big issue in terms of the dual circulation strategy is to rethink how much investment you want to do in the far western cities, and how much support in terms of urbanization should be focused on smaller cities compared to the bigger cities. And this is a sensitive issue. And the question in the coming years is whether China can balance both poverty needs and the need to grow faster. Because if you don't grow at 5 to 7 percent a year, you can't generate jobs particularly high value jobs.

The high value jobs tend to be created in the largest cities. In the U.S., you go to New York, San Francisco, Los Angeles, Chicago, that's where the good and high-paying service jobs are created – not in the small- and medium-sized cities. And that's true in Europe. It's also true in Asia. If you emphasize on small- and medium-sized cities, you will not encourage the growth of highly productive service jobs. That is in fact the big challenge for China in the future.

More and more people are getting educated. They are looking for relatively high paying jobs. The manufacturing sector only accounts for 38 percent of GDP today. It used to account for almost 50 percent. The fastest growing sector in China is services, which now accounts for 55 percent of the economy. 

So the issue in the 14th Five-Year Plan is how I can make sure that services, which is now leading the economy, produces good jobs, attractive to a broad group of Chinese. That is the challenge for the plan.