NATION STRIVES AHEAD TOWARD HIGH-INCOME TARGET
US can be overtaken as leading economy within decade, experts say
China will escape the so-called middle-income trap that many emerging countries have fallen into, moving beyond it to become the world’s largest economy within a decade, according to experts.
Xi Jinping, general secretary of the Communist Party of China Central Committee, said in a speech to the Fifth Plenary Session of the 19th Central Committee of the CPC in October that it was “completely possible” for China to become a high-income country by the end of the 14th Five-Year Plan (2021-25).
To achieve this, the nation, which was already an upper-middle-income country with a per capita gross national income of $10,410 last year according to the National Bureau of Statistics, would need to exceed the current World Bank threshold of $12,536. This would require annual GDP growth of 3.4 percent.
John Ross, a senior fellow at the Chongyang Institute for Financial Studies at Renmin University of China in Beijing, said he expects China to meet the target comfortably and show developing countries worldwide what is possible.
“On present growth rates, China will have gone from being almost the world’s poorest country in 1949 to becoming a high-income economy by World Bank international standards by around 2022 to 2023 — the span of a single lifetime,” he said.
Ross, a leading expert on the Chinese economy, said it would transform the global economy, more than doubling the proportion of people living in high-income countries from 16 percent to 34 percent.
“It shows there is a way forward for developing countries. No such step for so large a proportion of humanity has ever been taken before,” he said.
Michael Power, strategist at Ninety One, a global asset management business based in London and Cape Town, South Africa, said China will make the transition by transforming its economy beyond recognition.
“It has climbed the ladder of value-added industrialization. Many other emergingmarket economies in Latin America, Russia, Africa and much of the Middle East have failed to do this. Many have remained commodity-oriented,” he said.
Stephen Roach, a leading United States economist and senior fellow at Yale University’s Jackson Institute for Global Affairs, said China is set to escape the middle-income trap, as it has taken two important steps.
“It will have made great progress in rebalancing the structure of its economy — shifting its growth impetus from manufacturing to services, shifting the support of its aggregate demand structure from exports and investment to internal private consumption by Chinese households,” he said.
“It will also have succeeded in shifting from imported to indigenous innovation — drawing less on the technologies of others and more on those developed at home.”
Since 1960, only 15 countries and economies, including Japan, South Korea, Hong Kong, Taiwan and Singapore, have escaped the middle-income trap, according to the World Bank.
All the BRICS countries — Brazil, Russia, India, China and South Africa — have middle-income status, as do many Asian nations such as the Philippines, Indonesia and Malaysia. Thailand has set a goal of becoming a high-income country by 2037.
The middle-income trap has been a particular problem for Latin American countries. Argentina became a high-income country in 2017, only to be reclassified as a middle-income nation last year.
Keyu Jin, associate professor of economics at the London School of Economics, or LSE, said productivity has been a key issue for many Latin American countries.
“A number of countries, including those in Latin America, have failed to grow after reaching a certain level of income, mostly because of reduced productivity growth,” she said.
“What distinguishes China from the rest is a ‘pulling-up’ development strategy, which focuses on priorities such as education and infrastructure, rather than trickledown economics (involving tax cuts for the wealthy and corporations), which works in principle, but rarely in practice.”
Pitfalls warning
Zhu Ning, professor of finance and also deputy dean at think tank the Shanghai Advanced Institute of Finance, or SAIF, said China will be very mindful of the Argentina experience, and it is not just a question of reaching high-income status, but maintaining it.
“The bar for a high-income country is not constant, and gradually goes up. While we can celebrate China’s economic growth miracle, it is important that policymakers continue to watch out for potential pitfalls in the choices they make,” Zhu said.
Michael Pettis, professor of finance at Peking University and author of Trade Wars are Class Wars, argues that the main issue is debt, which he said has risen sharply over the past decade.
“It is pretty clear that China can only maintain high growth rates as long as debt is able — and allowed — to continue growing rapidly. Should Beijing ever decide to take steps to keep its debt burden from deteriorating, it might be very difficult for China to maintain growth rates much above 2 percent to 3 percent,” he said.
Many Asian countries were thwarted in attempts to escape the middle-income trap by the regional financial crisis of 1997, when a series of currency emergencies undermined an unprecedented period of success. China, still a largely closed economy, was relatively shielded from the impact.
Roach, former chief economist and Asian head of investment bank Morgan Stanley, said China has fully learned the lessons of 1997.
In particular, it has built up a stock of foreign exchange reserves, enabling the country to deal with the global financial crisis of 2008 and the COVID-19 pandemic, he said.
“China’s twin cushions — foreign exchange reserves and extremely high domestic savings rates — provided it with both the resilience and policy space to proactively address major economic and financial threats, unlike more-vulnerable economies. This is increasingly important in a crisis-prone world,” Roach added.
Louis Kuijs, chief Asia economist at Oxford Economics, an economics research consultancy, said China still needs to be cautious in opening up its capital markets, which could destabilize its economy if done too quickly, disrupting the nation’s high-income trajectory.
“It needs to manage to continue to correctly sequence financial reform. It is therefore crucial to make its exchange rate more flexible before capital controls are removed more fully. Emerging-market crises in recent decades have shown the risk of getting this sequence wrong,” he said.
China aims to go beyond merely meeting the high-income threshold level — advancing toward income levels in leading Western countries.
Xi, in his speech to the CPC Central Committee, also made clear his ambition for the country’s economy to double in size by 2035.
It has effectively done so over the past 10 years, and the nation is on the brink of becoming a “moderately prosperous society” in time for the Party’s 100th anniversary next year.
If the Chinese economy does double in size over the next 15 years, it is likely to surpass the US as the world’s largest during this time.
Hao Hong, managing director and head of research at BOCOM International Securities, based in Hong Kong, said the Chinese economy would have to grow at an annual rate of 4.7 percent to meet the 2035 goal.
“It is an ambitious target, given the size of China’s economy already. Mathematically, it is difficult to grow continually at a rapid pace, but in view of the low base this year, it should expand by 8 percent or 9 percent next year,” he said.
Jin, also a World Economic Forum Young Global Leader, is confident this can be achieved, as many areas of China still require major development.
“There are many opportunities for growth in China. Urbanization is only halfway done, services have the scope to grow to up to 80 percent of the economy, and although the level of human capital (in terms of workforce skills) has been accumulating rapidly, is still far from advancedeconomy levels,” she said.
“Future growth will be built on productivity, and productivity in China’s next stage of development has to be based on innovation. This will mean high-quality growth, not just growth.”
The stage at which China overtakes the
US to become the world’s largest economy, could have been advanced by the pandemic.
Power, at Ninety One, believes this could happen sooner than many observers think — even by the end of 2025.
“If economic recovery in the US from COVID-19 is lackluster — and I fear political stalemate in Congress might make it such — and if, more significantly, the US dollar were to fall, say 15 percent, over five years against the yuan, China could even pass the US by mid-decade. Whatever happens, it will be the largest economy globally by the end of the decade.”
Regardless of the progress China makes, it is likely to emerge as a giant economy in the near future. As such, the question is whether it will be possible for the US or other countries to decouple from China — even if they want to.
More integration
Hong, at BOCOM International, believes China will become even more integrated with the rest of the global economy.
“I don’t think there will be a decoupling. Deepening reform and further accelerating market opening and access suggest China is more connected with the world, not less,” he said.
Zhu, at SAIF, author of China’s Guaranteed Bubble, which examines risks in the country’s financial system, said attempts to isolate the nation will recede as its economic importance rises.
The pandemic has demonstrated the capability and success of China’s pragmatic approach to solving problems, which will probably enhance its international status in the near future,” he said.
China will work very hard to remain integrated with the global economy and worldwide financial system, Zhu added.
Roach, author of Unbalanced: The Codependency of America and China, said, “For open economies like China — especially in light of its new commitment to ‘higher-level reform and opening up’ — two-way (trade) flows with the rest of the world will render the verdict on global linkages.”
In the debate over the middle-income trap, the fact that many Chinese already lead comfortable high-income lifestyles is often overlooked.
Beijing and Shanghai, with respective per capita incomes of $23,805 and $22,799, according to the World Bank, are already regarded as comfortably high-income — on a level similar to the Czech Republic, Portugal and Bahrain.
However, Gansu, China’s poorest province, has a per capita income of $7,812, equivalent to those in many countries in sub-Saharan Africa.
Jin believes this adds complexity to the debate over how China will develop.
“Aggregate numbers belie substantial heterogeneity at regional and local level. What this tells us is that there is much room for convergence, and therefore opportunities, for growth even within China,” she said.
As the nation completes its journey to becoming a high-income country in a historically short period, part of the debate will center on whether this could have been achieved without a centrally planned economy.
Kuijs, at Oxford Economics, thinks that State planning has performed an important role.
“There are ways in which a relatively strong role for the State can have advantages for economic growth and development, mainly in terms of effective mobilization of resources. However, those advantages shrink and eventually disappear as the economy develops, and become more complicated,” he said.
Hong, at BOCOM, said the State’s role has been vital, and he expects it to play an even more important part in the next stage of China’s development.
“The central planning mode has been essential in allocating resources quickly at a very low capital cost and very high return. Going forward in a digital society, the case for central planning is even stronger,” he said.
Jin, at the LSE, has no doubts about the contribution made by the planning process.
“A benevolent government capable of allocating immobilizing resources is, of course, better than one that remains passive, or one that serves its own purposes,” she said.
“The Chinese government has filled in missing markets, organized networks for suppliers and producers, and lavished substantial resources on firms with high potential. In developing countries where institutions are still immature, the State can play a very important role.”
Power, at Ninety One, said that as policymakers finalize the 14 th Five-Year Plan, which should deliver China high-income status, the nation will have achieved the kind of “economic complexity” set as a standard by Harvard University’s The Growth Lab, which researches country development.
“Investing in infrastructure, an increasingly well-educated workforce, and the advantages of central planning have enabled the achievement of that complexity,” he said.
Future growth will be built on productivity, and productivity in China’s next stage of development has to be based on innovation. This will mean high-quality growth, not just growth.”
Keyu Jin, associate professor of economics at the London School of Economics