China has achieved miraculous growth in the four decades since economic reforms began in 1978, averaging 9.5% in real GDP growth per annum. However, growth rates have fallen persistently since 2010, so there are debates about the causes of the slowdown, future prospects, and the necessary actions for future growth.
China, as a transition economy, definitely has many internal structural issues. However, the recent slowdown of GDP growth since 2010 can be attributed mainly to external and cyclical factors, not domestic structural problems. In particular, export growth remains sluggish due to the subpar recovery of the advanced economies, and investment growth slowed after the effects of China’s large-scale fiscal stimulus programme wore off. This interpretation is supported by the finding that other emerging and advanced economies have seen an even sharper slowdown in growth over the same period.
Regarding China’s growth prospects, as a middle-income country, China possesses a ‘latecomer advantage’ in technological innovation and industrial upgrading. Per capita GDP represents a country’s average level of labour productivity as well as its technology and industry. China’s per capita GDP, measured by purchasing power parity, was 21% of that of the US in 2008, similar to Japan’s in 1951, Singapore’s in 1967, Taiwan China’s in 1975, and South Korea’s in 1977. With the same gap of per capita GDP and thus latecomer’s advantage, Japan and the other three East Asian economies grew at 8-9% annually for 20 years. This indicates that China, under favourable circumstances, has the potential to grow at 8% up to 2028.
Other positive factors for growth prospects in China include low levels of urbanisation and educational attainment, and a relatively high share of agricultural employment at 30%, which provides a substantial pool of labour that can be redeployed to higher productivity sectors.
However, the external and cyclical downward pressures are likely to persist. China will have to rely on domestic demand to achieve the growth target of around 6.5% in the coming years. With a growth potential of 8%, the good investment opportunities in industrial upgrading, infrastructure, supporting the environment, and urbanisation, and ample investment funding from fiscal resources, private savings, and large foreign reserves, China will be able to maintain a reasonably high investment growth rate. As such, employment level will be high and household income, as well as consumption, will continue to grow dynamically. These favourable conditions will not only allow China to achieve its growth target but will also provide space for structural reforms, which are often deflationary in the short run.
There are a number of structural issues that China needs to address in order to realise its growth potential and complete the transition to a well-functioning market economy. First, China can adopt measures to facilitate the reallocation of workers from low value-added sectors to high-value-added sectors, raise the retirement age, increase levels of human capital through education, and relax or abolish the hukou system to offset the negative impacts related to the Lewis Turning point.
China’s fiscal space for countercyclical intervention is still large. What China needs to do is to overcome local governments’ term mismatches by allowing them to issue long-term infrastructure bonds to replace debts and to support new projects. The government also needs to take measure to deleverage private sector debts. Since demand is not expected to rebound in the short-term to absorb the excess capacity in a number of key sectors, excess capacity should be wound down by a process of industrial restructuring, including lay-offs and consolidations. The restructuring should be carried out by strengthening the implementation of environment and energy standards so as to weed out polluting and inefficient firms.
In China’s dual-track gradual transition, many distortions exist due to government obligations to subsidise the comparative-advantage-defying, capital-intensive, large-scale state-owned enterprises (SOEs). With rapid economic growth and capital accumulation, most capital-intensive industries have become China’s comparative advantages and firms in those industries have become viable. Except for a few national defence-related industries, the subsidies and protections are not essential for most SOEs’ survival and the government should eliminate distortions to create a level playing field for SOEs and non-state firms.
The most important way of subsidising capital-intensive SOEs is their preferential access to low-cost capital from the large state-owned banks and equity markets. China should liberalise interest-rate controls and improve financial structures by increasing the numbers of small and medium-sized local banks and internet-based financial institutions to improve financial access for agricultural households and micro, small, and medium-sized firms in industries and services.
By implementing the countercyclical measures and structural reforms above, China will be able to maintain a medium-high growth rate in the coming years, complete its transition to a well-functioning market economy, realise its dream of national rejuvenation, and continue to be the main driver of global growth.
 These comments also form part of a forthcoming article (2019) in Frontier of Economics in China, 14(1) which emerged from a conference paper presented at a roundtable on ‘The causes and way-outs of China’s growth deceleration’, organised by the Institute of New Structural Economics and National School of Development, Peking University in Beijing on 19 December 2017. The larger article draws heavily on Lin, J., Wan, G., and Morgan, P. J. (2016). Prospects for a re-acceleration of economic growth. Journal of Comparative Economics, 44(4), pp. 842-853.
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