10th February 2024 – (Beijing) Even before the pandemic, China’s economy had slowed significantly, with GDP growth falling from 10.6% in 2010 to 6.1% in 2019. Nevertheless, over the previous 30 years, China outpaced all other nations in economic growth, with GDP per capita growing by over 9% annually – starkly higher than the global benchmark of less than 2%. In today’s new economic climate, can China continue growing faster than other countries?
To answer this, we must address two fundamental questions: what catalyzed China’s rapid development after 1978, and what underpins the recent downturn? Unfortunately, misconceptions cloud analysis of China’s economy, influencing policies. Dispelling these and focusing on reform, openness, and robust fiscal and monetary policies can put China’s economy back on an upward trajectory.
China’s extraordinary growth is often credited to its low starting point, demographic dividend, reform policies, globalization, foreign investment, exports, political stability and industrial policies. However, many developing economies share these characteristics yet achieve far slower growth. Reform, openness and stability enabled growth, but do not explain why China outpaced peers.
Likewise, its slowdown is blamed on an ageing population, debt, overdependence on investment and exports, and geopolitics. But these do not account for the sharp decline over a few years, nor the strong recovery in 2021. Geopolitics did not trigger the pre-2020 downturn; its influence is nascent.
Two sources perpetuate misconceptions. First, China is often compared only to developed economies like the U.S. and Japan, not developing countries. The second is conflating long-term growth with short-term fluctuations. The former depends on productivity and supply-side factors like investment, education and technology. The latter relates to demand-side factors like consumption, investment and exports influencing annual growth rates. Confusion between the two can misguide policies.
China grew faster than almost all developing economies primarily due to high savings rates and quality basic education, enabling it to rapidly industrialize. Its savings culture is shared by successful East Asian economies, though insufficient alone for growth. Open and stable conditions are also essential.
Other East Asian economies also averaged over 6% GDP per capita growth until reaching 40% of US per capita income. At 16% currently, China has substantial potential if reforms continue. Supply-side factors – investment, education and technology progress driving productivity – remain key to long-term catch-up with advanced economies.
Statistics show China’s downturn is mainly an investment collapse, less affected by consumption and exports. Investment drives short and long-term growth, yet recent policies prioritized boosting consumption over investment, precipitating the slowdown.
Some argue overdependence on debt-financed, export-driven investment and insufficient consumption caused overcapacity and inefficient allocation. They warn this could trigger crises. But high savings naturally increase deposits, debts and leverage. Corporate debt/asset ratios are healthy. With abundant state assets, even higher government leverage is sustainable.
Most economists favour the private sector and market forces for growth. But some resist fiscal and monetary stimulus to boost investment, ironically hampering private firms most. China’s high M2 ratio reflects savings, not excessive money printing. Policies reducing leverage and risk have backfired, causing liquidity crunches. Contrary to their aims, they have heightened risks.
With early signs of deflation, bolder policies are needed to boost growth and tackle slowdown. Market reforms combined with fiscal and monetary easing can stimulate demand and confidence. The substantive further opening will signal a commitment to a market economy and greater openness. Timely fiscal stimulus and quantitative easing can ease local government and real estate debt issues.
With high savings and state assets, more government debt is sustainable to revive growth and resolve debt crises. The liquidity issues stem from declining incomes and asset values due to a weak economy. Recovery is the ultimate solution.
In summary, China still has the potential for near 7% growth. Geopolitics may slow this slightly but won’t dramatically alter the trajectory. Since 2006, China has relied less on exports and foreign capital – outcomes of development, not geopolitics. China’s future hinges on its own policies.
Further market-driven reforms, mobilizing China’s strengths in savings and education, better incentives especially for private firms, and supportive fiscal and monetary policies can sustain its edge over most countries. The outlook remains bright.
China demonstrates substantial technological dynamism, countering the idea of a middle-income trap, says renowned economist Jeffrey Sachs. Its continued strength as the world’s factory for infrastructure and green tech belies notions of hollowing out. Sachs argues U.S> attempts to slow China’s rise by limiting trade and technology are “doomed to fail” given China’s economic size, integration and technological capabilities. He says the Belt and Road Initiative exemplifies China’s win-win thinking and helps other emerging economies develop modern infrastructure.
Whether a country overcomes the middle-income trap depends on its governance capacity. Analysis shows this requires an effective market, social harmony, and an active government.
Reform policies that liberated productivity created an effective market allocating resources efficiently. Steps to build a harmonious socialist society addressed dangerous disparities that could provoke unrest. China’s governance actively guides development through strategic plans like the Five-Year Plan.
These conditions have enabled rapid growth and poverty reduction. To cross into high-income status, China must now tackle new challenges that arise with its development level, guided by the Five Development Concepts of innovation, coordination, greening, openness and sharing.
With continued reform, and leveraging its strengths in high savings and education, China’s governance capacity can ensure steady growth. While some slowing is inevitable as the economy matures, there is no inherent middle-income trap deterring China from joining advanced economies, provided the right policies continue guiding its progress.