China’s economic progress is slowing. A rapidly ageing population means its demographics are becoming increasingly unfavourable, and China has reached the limits of its traditional reliance on investment and exports to fuel rapid economic growth. The key question is what comes next. Continuing with the same approach risks a further decline in the pace of growth. This would create major difficulties for its highly leveraged economy, disappoint the growth expectations of its populace, and add to the internal and external economic risks that are already evident. Deep reforms will be required just to sustain a trajectory of 5 to 6 per cent growth annually over the coming decade.
Beijing’s current policy strategy, with its focus on domestic innovation and protecting the privileged status of state-owned enterprises, is unlikely to prove sufficient. Nor will an overly narrow focus on resolving the current trade disputes with the United States. A better approach for China is to emulate the strategy behind the successful economic transitions of Japan and Korea – shifting its focus towards the economy-wide absorption of mature technology, fostering private competition, and exposing China’s state-owned enterprises to efficiency targets. To sustain a conducive international environment, bold public steps to shore up the global trade and investment system will also be critical.
None of this will be easy, since it will require the deft handling of a new set of winners and losers compared with the status quo. Nonetheless, the reforms required to sustain a strong growth path over the coming decades are all firmly within China’s grasp and not reliant on the actions of other countries.
- China’s economic growth has fallen to its slowest rate since 1990, and this deceleration looks set to continue. Key factors include weakening demographics, inefficient investment, maturing export markets and declining productivity growth rather than the current trade dispute with the United States.
- To reverse that trend, China will need a wide-ranging policy approach that mimics the policies implemented by Japan and Korea at a similar economic stage.
- While there are considerable political and economic obstacles to such reforms, if it manages to continue its rapid catch-up to advanced economy incomes the potential returns for both China and the world are significant.