Chi on China: China’s growth beyond the mMiddle-income trap
We know what we are, but know not what we may be - William Shakespeare
- China could avoid falling into the middle-income trap if it could break the economic constraints of population, capital and productivity on growth. But can it realistically do that and what will it look like in the post-middle-income environment?
- Consumption-led growth and industrial upgrading will be two of the key emerging themes for China’s structural change story in the next 30 years when President Xi Jinping’s “Chinese Dream” is supposed to yield some tangible results.
- The structural switch from quantity to quality growth has just begun. The ultimate question is who will benefit from China’s transition to a high-income, high-tech and consumption-led economy from being the world’s factory?
China’s annual GDP growth has fallen from double-digit rates between 1980 and 2012 to around 7% since President Xi Jinping took office in 2013. Growth is now expected to fall below 6% in the coming years. This declining trend seems to vindicate warnings of the dreaded middle-income trap – the tendency of fast-growing developing economies to revert to a much weaker growth trajectory, and stagnate when per capita income approaches the upper bound of the middle-income range between USD6,000 and USD12,000 a year, according to the World Bank. China’s per capita income in 2018 was already USD10,200.
Economic growth is a function of the two factors of production – labour/population and capital – and a residual factor – productivity. When a country’s grows towards its production possibility frontier (PPF) which defines the size of the economy, diminishing marginal returns set in (Chart 1). If there is no growth in productivity, overall economic growth will stagnant and eventually decline.
 A production possibility frontier is a curve that shows all the possible combinations of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilised.
Making our range of investment products ESG-proof also means tackling asset classes and industries where data availability and transparency still have some headway to make. While challenges remain, for example in emerging markets, we can now rank debt issuers comprehensively on the basis of some 90 factors. This gives us a good view of whom to embrace and whom to avoid in our EMD portfolios, as Bryan Carter explains in the first article. Having a presence on the ground matters in this respect, including in China, where our senior economist Chi Lo keeps tabs on Beijing’s efforts to transform the economy while maintaining the momentum of growth. Read his latest analysis in our second article. Finally in this edition, an extensive write-up of the many efforts and initiatives – our own and those of the many multilateral organisations we belong to – en route to a sustainable finance system, all the while remembering that there is further to go before the world becomes a better place.
Facing strong growth headwinds, Beijing will likely maintain its policy easing bias for some time yet. We believe this scenario is positive for bonds in the short term, but weak GDP growth looks set to limit equity performance until signs of solid economic stabilisation or recovery emerge in China, as Chi Lo argues in this edition of The Intelligence Report.
Reflation could be lurking around the corner. Judging whether it will actually appear depends on factors including supply shocks, de-globalisation, fiscal stimulus and signs of economic recovery.
Here’s reflation, well, for now
Recent geopolitical news has caused financial markets to trade in a reflationary fashion, shrugging off weak data and concern over structural Sino-US tensions, even if the economic slowdown may evoke memories of Q4 2018. Are the similarities actually there?, we ask in this issue of The Intelligence Report .