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The Chinese Economy Has Entered a Key Stage of Growth Transition


By Chen Changsheng, Department of Macroeconomic Research, Development Research Center of the State Council (DRC)

Research Report No 102, 2013 (Total 4351)

Over the past three decades, the Chinese economy has witnessed an average annual growth of 9.8%, 6 percentage points higher than global growth in the same period. Between 1978 and 2012, China's per capita GDP rose from US$ 154 to US$ 6,060, or from 220 international dollars to 9,100 international dollars based on purchasing power parity, indicating a change from a low-income country to an upper middle-income country. In terms of trade in goods, China has grown from a small trader with a share of less than 1% in the world to the largest exporter of goods and the largest manufacturer of the world, with a total manufacturing output larger than the United States. With the aggregate GDP totaling US$ 8.2 trillion, China is the second largest economy in the world, only after the United States, and has made remarkable progress in its social and economic development. However, rapid growth will not last forever. Internal and external environment, the current stage of development and the changed world economic order have brought different features to China's economic growth. The potential growth rate will slow down in the medium and long term, and the economic operation will become more fragile, ushering in a new stage full of challenges as China gets closer to a high-income society.

I. A Gradually Falling Potential Growth Unveils a New Stage of Growth

First, there will be a diminished advantage of low-cost labor, a lower savings rate and a decreased investment rate. As the income grows, people become less willing to have children, and the long-term effect of the family planning policy will be there for quite some time. Therefore, China will see a demographic structure featuring low birth rate, low death rate and low economic growth. The working age population will reach its peak in 2015 while the old-age dependency ratio will rise rapidly. This will largely undermine the advantage of low-cost labor, drag the savings rate down, and in turn cause the investment rate to fall. According to international experience, investment rate peak would basically go side by side with that of economic growth.

Second, available technological space is reduced. An important reason for catch-up countries to finish the task in a short time what advanced counties have achieved for years is that the former can capitalize existing advanced technologies and systems to enhance fast the total factors productivity (TFP). However, they could only get limited frontier technologies and experience at low cost as they are approaching the technological frontier. International experience indicates that the TFP growth rate of catch-up countries will see stepped decline and drop significantly when per capita GDP reaches about 10,000 international dollars. When the catch-up period concludes, the technological strides will obviously slow down, reflected by a lower TFP contribution to economic growth.

Third, the space for more domestic demand of industrialization features gradually becomes smaller. Industrialization basically features standardized and large-scale production, more detailed internal division of labor and rising intermediate inputs. It is also accompanied by, on the one hand, fast increasing demand for important industrial products and capital goods as evidenced by hiking output of steel, electricity, auto, cement and household appliance, and on the other hand, the concentration of population and relevant factors, increasing integration of domestic market and fast enhancement of the urbanization rate which produces huge demand for infrastructure construction. It proves that the output of major industrial products will reach its peak value and the urbanization rate will grow slower when the per capita GDP reaches about 11,000 international dollars. Calculated according to this rule and the present per capita major industrial products in China, the absolute peak value or the growth peak value of the output of steel, cement, building and auto will respectively show up after 2015.

Fourth, the growth of export will slow down. China's swift involvement in globalization has expanded its external demand and has become an important driving force for its rapid economic growth. Noticeably, China's share in the world trade (11%) has reached the historical peak value of Japan and Germany. With industrial upgrading, China's export is facing pressure from two sides. On the one hand, further upgrading of China's exports will bring stronger competitors (mainly developed countries like Europe, America and Japan) and turn differentiated competitions into homogeneous competitions, thereby making it increasingly more difficult to seize the international market. On the other hand, with continuously rising labor cost, China's traditional export advantage is also challenged by more intensive competition from emerging countries. Besides, the global economy has entered the low-growth-rate period after the crisis. All these will gradually press down China's export growth from over 20% to around 10%, resulting in a weaker push to the economy.

II. Catch-up Economies Would Experience Two Different Kinds of Decelerated Growth Following the High-growth Period

The history of growth of various countries (economies) after the Industrial Revolution indicates that there are ups and downs with the economic development and no country can enjoy ever-lasting rapid growth. Among them, catch-up economies can always make use of existing experience in technology, management, market, system and other areas to enjoy an obviously accelerated growth rate in a certain period. They have spent a shorter time than advanced economies to reach a certain level of development and their development features a compressed fast growth. For example, it takes the UK 141 years and the United States 109 years to increase their respective per capita GDP from 1,800 international dollars to 11,000 international dollars. Japan, Singapore and Hong Kong SAR of China have only spent 54, 37 and 31 years respectively to reach that goal, and South Korea and Taiwan of China spent only 27 years for that. For catch-up economies, the lower the original per capita GDP is, the higher the average growth rate is in the catch-up process; the later the economy takes off, the sooner it reaches a special level of development.

However, history shows that not every take-off economy can smoothly achieve industrialization and enjoy steady landing, because many will drop out halfway in the catch-up process. Since 1960, a total of 101 countries and regions have ranked among global middle-income countries after short-term fast growth, but till 2008, only 13 countries and regions had successfully jump into the high-income rank and basically completed their catch-up task. This is evidenced by Japan, South Korea, Taiwan and Hong Kong SAR of China, Puerto Rico, Mauritius, Singapore and Israel, etc.. However, most countries and regions have failed to finish this process and dropped out in the catch-up course. They fell into the "middle-income trap" featuring economic stagnation and even setback due to various reasons, typically represented by some Latin American countries and a number of states from former Soviet Union and Eastern Europe.

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