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China mulls new measures to avoid ‘middle income trap’
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AFTER over 30 years of torrid growth catapulted China into the group of middle-income countries, the government faces the task of preventing prolonged stagnation experienced by many countries following similar increases in living standards.
China’s gross domestic product (GDP) per person was around US$6,000 last year.
By World Bank standards, this makes China a “higher middle income country,” a phase in which many countries, such as Latin American economies, are finding it hard to sustain growth.
This stagnation is identified by some economists as the “middle income trap,” and as China’s economy gradually slowed down in recent years, it became questionable whether China could avoid the syndrome.
Confident of growth
The economy grew 7.8 percent last year, the slowest since 1999. Growth in the first three quarters this year was also 7.8 percent, and analysts generally expect less expansion in the fourth quarter.
In a response to worries over China’s prospects, President Xi Jinping, when meeting with a group of foreign members of the 21st Century Council in Beijing last week, stressed that China is confident of achieving sustainable and healthy growth.
“There are sufficient internal factors supporting China’s economic development. We are confident that the Chinese economy will keep growing in a sustained and healthy way,” said the President, denying the possibility of any middle income trap.
Just days earlier, Premier Li Keqiang had spoken of a “golden balancing point”: a fair economy that is both stable and sustainable.
Qiao Hong, chief economist for greater China at Morgan Stanley, said the leaders’ remarks showed confidence in the strength of the economy, coupled with an awareness of what needs to be done.
“Their comments can also be read as a pledge to drive growth through deeper reforms and opening-up,” she added.
New set of drivers
Kuang Xianming, head of economic research at Hainan’s Institute for Reform and Development, said some countries fail to escape the trap because they are unable to adapt to new dynamics that require more sophisticated growth drivers.
The key for China to head off such a trap is to shift from reliance on investments and dividends brought by massive population and globalization to a new set of drivers led by the market mechanism, domestic demand and social development, where the potentials are yet to be tapped, said Kuang.
In light of China’s current economic picture, analysts say comprehensive reform is urgent, and major effort is requird to avoid systematic financial risks, rebalance the economy, and unleash growth potentials.
Action is already underway as China tries to restructure the economy: lending rates have been scrapped to further liberalize interest rates; the Shanghai pilot free trade zone is up and running; redundant administrative procedures have been slashed.
The leadership has reiterated its commitment to rolling out more reforms to upgrade growth.
In a few days, authorities will meet for the third plenum of the 18th Central Committee of the Communist Party of China and a comprehensive reform package is anticipated.
If significant reform policies are made and carried out in key sectors, China is very likely to see fresh economic impetus helping it vault the “middle income trap” and land into the ranks of high-income nations.
“Although growth is harder to achieve as economic volume expands and a population ages, China can still attain relatively fast growth through the more efficient use of human capital and production resources,” said Qiao Hong, suggesting China has the potential to attain annual growth of around 7.6 percent from 2011 to 2020.
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