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Elaine Chan

China’s economic growth will slow to 2 per cent in the coming decade, well below the level forecast by major global institutions, according to research from Capital Economics, as the country becomes “another normal emerging economy.”
“Growth has halved over this past 10 years, and our projection is if they continue with this policy set-up [and structural issues], growth will halve again over the next 10 years,” Mark Williams, chief Asia economist for the research firm, said at a conference in Hong Kong this week.
The figure undercuts the forecasts of major international institutions.



“Two per cent [growth] for an emerging economy is about normal, particularly if you think about China’s demographics and other problems,” Williams added.
“What we are saying is China’s just going to become another normal emerging economy.”
On Tuesday, Chinese Premier Li Keqiang announced a growth target of between 6 to 6.5 per cent for this year as he delivered his government work report at the opening of the National People’s Congress – the country’s parliament.
China’s government also lifted its 2019 budget deficit target to 2.8 per cent of gross domestic product from last year’s 2.6 per cent, giving Beijing more room to step up tax cuts and increase infrastructure spending to stabilise its sagging economy.
Business and personal taxes will be cut by 1.3 trillion yuan (US$194 billion) this year, more than the 1.1 trillion yuan in last year’s cuts, the premier said.
The government will also cut the value-added tax rate for manufacturing firms from 16 per cent to 13 per cent and reduce the rate for transport and construction firms from 10 per cent to 9 per cent.
“Our moves to cut taxes on this occasion aim at an accommodative effect to strengthen the basis for sustained growth while also considering the need to ensure fiscal sustainability; are a major measure to lighten the burden on businesses and boost market dynamism; … and are the result of a major decision taken at the macro policy level in support of the efforts to ensure stable economic growth, employment, and structural adjustments,” Li said, according to an official English-language version of this speech.
Our moves to cut taxes on this occasion are the result of a major decision taken at the macro policy level in support of the efforts to ensure stable economic growth, employment, and structural adjustments.
Li Keqiang
The Organisation for Economic Cooperation and Development has forecast China’s economy will grow about 3.5 per cent in 2029 and 2030, while HSBC has predicted growth of 4.7 per cent between 2028 to 2033.
Other major institutions have stopped short of predicting a decade in the future with the International Monetary Fund’s furthest prediction 5.6 per cent for 2023, while the World Bank’s is 6.2 per cent for 2020.
“The cyclical slowdown in China’s economy still has some way to run, at least till the middle to second half of this year, and then any subsequent rebound will be a small one,” added Williams. “Perhaps more important is beyond these cyclical movements, the structural slowdown is continuing.”
Deep-rooted structural issues – inefficient infrastructure spending, the dominance of state-owned enterprise (SOEs), lack of financing for private firms that are considered to be more efficient, and a huge pile of debt – have weighed on China’s economy, which is growing at its slowest pace in nearly three decades, and are hindering a shift in growth towards domestic driven demand.




The trade war, Williams said, was “not really a big problem facing China’s economy” – his firm estimated the total impact at about 2.5 per cent to gross domestic product, or in the worst case, 5 per cent if trade negotiations fell through and US tariffs were increased.
“Exports to the US are not that important to the Chinese economy, as a factor in the [current] slowdown,” he said.
Instead, China’s domestic downturn is largely caused by deeper structural issues, and the deleveraging campaign to limit financial risk – which is seen by the central government as a national security concern.
China’s working age population – adults aged 16 to 59 – stopped increasing in 2012 and has fallen steadily since, and last year, shrank by another 4.7 million to 897 million, according to China’s National Bureau of Statistics.
The drop in the country’s birth rate combined with its shrinking labour force and rapidly ageing population present clear economic challenges in the coming decade.
In addition, economists say one of China’s biggest challenges is reforming its inefficient SOEs, which have easy access to cheap loans and government subsidies.
Six key takeaways from China's annual policy blueprint
But returns on SOE assets are half of the 8 per cent recorded by private firms, which get little government preferential treatment, even though they account for 60 per cent of China’s output and 80 per cent of employment.
While Williams agreed that China is under pressure to raise productivity, the state-led drive of protecting certain sectors and merging SOEs, also embedded in its “Made in China 2025” industrial strategy, was not the best way, in his view.
“The problem is this sort of state-led development has not had a very good record of success in other countries. It has really not succeeded in China,” he said.
Meanwhile, despite the slower growth pace, China’s economy remains on track to become the world’s biggest.
HSBC and OECD predicted the size of the economy to reach US$26 trillion and US$36.7 trillion in 2030. Their forecasts for the US economy, on the other hand, are US$25.2 trillion and US$21.9 trillion for the same year.
Nonetheless, a 2 per cent growth pace meant Chinese households’ incomes will grow at a much slower rate than in the past, said Williams.
“We’re not expecting mass unemployment, just much slower growth in incomes,” he said.
“In a much slower growth environment, the [Communist] Party will aim to keep even tighter control over dissent. A slower growth future is one in which controls over information, the internet and the growth of civil society are kept in place and even tightened over time, so as to shore up the Party’s control.”


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Li Keqiang, China's premier, is displayed on a screen while speaking during the opening of the Second Session of the 13th National People's Congress (NPC) at the Great Hall of the People in Beijing, China, on Tuesday, March 5, 2019. China lowered its goal for economic growth and announced a major tax cut, as policymakers seek to pull off a gradual deceleration while grappling with a debt legacy and the trade standoff with the U.S. Photographer: Qilai Shen/Bloomberg

Delegates applaud Li Keqiang, China's premier, as walks from the podium after speaking during the opening of the Second Session of the 13th National People's Congress (NPC) at the Great Hall of the People in Beijing, China, on Tuesday, March 5, 2019. China lowered its goal for economic growth and announced a major tax cut, as policymakers seek to pull off a gradual deceleration while grappling with a debt legacy and the trade standoff with the U.S. Photographer: Qilai Shen/Bloomberg

Premier Li Keqiang announced his government work report during the opening of the National People's Congress at the Great Hall of the People in Beijing. Photo: AFP

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Premier Li Keqiang delivering the work reports at the opening session of the China's National People's Congress at the Great Hall of the People in Beijing. Photo: AP

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epa07410479 Chinese President Xi Jinping (L) and Chinese Premier Li Keqiang (R) arrive for the opening of the Second Session of the 13th Chinese People's Political Consultative Conference (CPPCC) National Committee at the Great Hall of the People (GHOP) in Beijing, China, 03 March 2019. The CPPCC is the top advisory body of the Chinese political system and runs alongside the annual plenary meetings of the 13th National People's Congress (NPC), together known as 'Lianghui' or 'Two Meetings'. EPA-EFE/WU HONG

Chinese Premier Li Keqiang appears on a screen as he speaks during the opening of the second session of the 13th National People’s Congress outside the Great Hall of the People in Beijing. Photo: EPA

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