China continues the economic miracle, argues AXA IM’s Yao

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After more than three decades of rapid growth, the Chinese economy is at a major cross-roads. An ageing population and growing structural imbalances are casting doubts about the sustainability of the existing growth model. Aidan Yao, AXA IM Emerging Asia Economist, argues that rebalancing the economy towards productivity growth will be key for sustaining China’s continued economic convergence. He delves into the key structural reforms needed to generate productivity gains and analyses their potential impact on China’s medium-term growth path.

  • China’s economic growth has become increasingly reliant on factor inputs (i.e. labour and capital), while productivity growth has slowed abruptly since the financial crisis. This growth model is becoming unsustainable due to rapidly ageing population and increasing structural imbalances.
  • The secret for China to continue its rapid economic convergence lies in rebalancing the economy towards productivity growth. This requires changing the structure of the economy, removing distortions of administrative controls and lifting the efficiency of resource allocation.
  • Notwithstanding the headwinds, the Chinese government has announced, and started to implement, a comprehensive reform plan to hasten the pace of economic rebalancing. If these reforms deliver the results expected in our baseline case, China’s per-capita income could double from the current 20% to reach 40% of the US’s by 2030.
  • But without reforms, a combination of deteriorating demographics and worsening structural imbalances could take a severe toll on economic growth in coming years. In our adverse scenario, the pace of economic convergence will stall beyond the current decade, forcing China into a mid-income trap.

The full report can be found here.

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