After nearly 30 years of breakneck growth, China is confronting a new normal of slower growth. While still far from reaching zero – or even falling to the growth levels of developed countries – it has moved from its peak of over 11 percent annual growth to around a still very high 8 percent.
There are a number of factors that will prevent China from returning to its previous highs, and will perhaps slow growth even further.
First, there are a number of classic economic concepts that explain China’s current transition, including the Lewis Point, and the “middle income trap.” The Lewis Point refers to the gradual disappearance of an unlimited rural labor supply that happens when a country develops. This, along with the commensurate rise in labor wages, is certainly happening in China, and as this World Bank blog post notes, could cause a decrease in FDI as China becomes a less attractive manufacturing destination. The characteristics of the workforce are also changing – more and more Chinese are going to college, creating a workforce more suited to skilled tasks than factory work.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
The middle income trap, as explained by this excellent New York Times article, is when a country’s growth starts slowing once per capita income has reached between $5,000 and $15,000. Once a country has reached a certain economic level, it becomes harder to grow further, in a situation analogous to the law of diminishing returns.
Additionally, China is reaching the end of its demographic dividend, the disproportionate number of working age people that allowed it to leapfrog growth. Now, it’s approaching a population that can be described as an upside down triangle, with far more older people than working aged people. The number of elderly will put significant strains on China’s already questionable social safety net, and will create immense healthcare costs.
Scholars and economists have focused on promoting economic restructuring and a transition to a consumer-led growth model, but China’s new normal will require new infrastructure and evolved policies beyond economics. So far, the Chinese government has been “crossing the river by feeling for stones,” which has worked with the support of red hot growth and its ability to lift so many Chinese out of poverty. Slower growth will present unique challenges, and there’s a lack of foundation to respond to these challenges.
For instance, China has to create better health and educational systems. Despite a recent $27 billion effort to improve health care coverage in China, health care costs remain high for the average citizen. According to a New York Times article, Chinese often have to pay out-of-pocket costs of more than 50 percent, meaning that one illness can lead to a lifetime of debt.
As for its educational system, China is well-known for its emphasis on rote learning and memorization in schools. A student in Jiangsu province recently made headlines when he railed against the educational system’s sole emphasis on test scores and exams, which some allege has made Chinese students “in the box” thinkers. There are plans to reform the system by 2020 to include more problem solving and creative thinking.
This dovetails with the need to make China more innovation-based. China is woefully short of its own brands with international appeal, and recent government policies have reflected an understanding of this problem. An innovation-based economy will also require more stringent intellectual property standards, so that entrepreneurs and companies are willing to expend time and money on new ideas.
Social reforms are also needed to reduce inequality to prevent a further increase during periods of slower growth. One idea that has recently gained momentum is to reform the hukou system, a residency registration system that effectively boxes migrants out of social services in cities.
Of course, these issues deserve essays into themselves, but the larger point is that there are a number of challenges that China will have to confront as its growth path changes, challenges beyond strictly economic ones. The new leadership would be smart to stay ahead of these issues if it wants to preserve economic, political, and social stability.