China must face up to the constraints on its growth
Cary Huang says problems such as overcapacity and bad debt need to be fixed to sidestep the middle-income trap for the next economic leap
The recent deceleration in China's economic growth has raised serious questions over whether the world's second-largest economy is settling into a protracted period of subdued growth, better known as the "middle income trap". Lou Jiwei , the finance minister, reinforced such fears recently by saying that the country had a 50 per cent chance of heading for the miserable fate in the next five to 10 years.
While the slowdown is a structural inevitability, China is especially vulnerable because its decades-long rapid growth has been based on cheap labour and state-led investment. With a quasi-capitalistic economy, it is more challenging to move to a higher-income bracket, as its East Asian peers, Japan, Singapore, Taiwan and South Korea, have done in the past.
The term "middle income trap" is probably most readily applicable to several Latin American economies that have failed to achieve high-income levels despite reaching middle-income status many decades ago. The World Bank defines middle-income nations as those with a per capita income of between US$1,006 and US$12,275. China's per capita gross domestic product stood at US$7,575 last year.
History suggests that high-speed growth tends to be extremely short-lived; just nine years on average. But, from 1980 to 2012, China's GDP growth averaged 10 per cent per annum. However, the economy has slowed considerably in the first quarter of this year, to just 7 per cent, firmly marking the end of the high-growth heyday.
Economics suggests that countries with especially high growth rates when incomes are very low are more likely to slow down when they reach the middle-income level. China falls into this category.
Another key determinant of China's economic future is demographics. The nation's growth has been largely built on a plentiful supply of cheap labour. But the labour-intensive economy has recently reached the "Lewis turning point", moving from a period of unlimited supply to a new era of labour shortages and rising wages.