Chinese economy remains promising for long-term growth

By LIAN ZHIXIAN / 04-15-2024 / Chinese Social Sciences Today

Rows of containers at the Xiamen Port in Fujian Province Photo: TUCHONG

In recent times, some Western scholars and media platforms have persistently disseminated disparaging narratives concerning the Chinese economy. Nonetheless, empirical evidence and theoretical analyses consistently refute their negative assertions. While China encounters intricate economic challenges, these do not necessarily indicate an impending recession. In light of the current state and future outlook of the Chinese economy, CSST recently conducted an interview with Margit Molnar, head of the China Desk within the OECD Economics Department.

Long-term growth potential

Certain Western pundits maintain that few economies globally can sustain long-term stable growth, suggesting the Chinese economy is on the brink of collapse following decades of rapid development. In response to these assertions, Molnar highlighted the need to distinguish long-term growth potential and short-term cyclical fluctuations, noting that understanding China’s recent and future growth hinges on recognizing the trends in its potential growth trajectory.

“It is true that no economy can grow at a high rate for an extended period of time. Convergence theory suggests that economies with lower incomes will grow faster to catch up with the advanced economies, but as they catch up, their growth slows,” Molnar said. However, population booms and a large-scale rollout of infrastructure and other investments can potentially boost growth if they are well managed. In the long term, only productivity growth driven by innovation can move an economy forward.

Molnar told CSST that China has transitioned beyond the phase of population boom and has managed to reap the “demographic dividend” through massive job creation and upskilling of the population. In addition, growth has been boosted by large-scale infrastructure expansion. While China’s capital stock is still relatively low compared to the advanced economies, investment is likely to remain an important growth driver for the coming years.

Reform dividend

In her analysis of the pressures confronting China, Molnar noted that China’s working-age population, whether in absolute terms or as a proportion of total population, has been in decline for more than a decade already. “This trend is hard to contain, let alone reverse. Moreover, the effects of population ageing kick-in in a more pronounced manner compared to advanced economies, implying that there is a downward pressure on growth in the long term.”

Nonetheless, China still has ample room to reap the so-called “reform dividend,” Molnar asserted. “That is, there are several reforms that could be implemented, and which counteract the effect of swift population ageing. This way, potential growth could be held up for longer. In addition, constant innovation, if it translates into productivity increases, could also uphold growth.”

Reforms with the greatest potential to boost growth, and therefore of most imminent importance, include increasing competitive pressures in service industries by phasing out administrative monopolies, Molnar said. 

“While competition, measured by mark-ups, is considered stiff in manufacturing industries compared to peers according to our research, it is not the case in services industries. Greater consumer protection could also be an important source of competitive pressures. A more efficient use of fiscal resources would enhance overall economic efficiency. Greater social protection would lower precautionary saving motives and boost consumption, which, in turn, would boost demand for goods and services and jump-start the real economy,” Molnar recommended. 

Different from Japan’s case

Some Western scholars have drawn parallels between Japan and China, arguing that the continued economic recession in post-1990s Japan will be replicated in China. Molnar stressed the importance of identifying the crucial differences in their respective stages of development.

“On one hand, Japan was already a highly advanced economy and the second largest in the world when the real estate bubble burst and the economy fell into a downward spiral of low growth and deflation. China, in contrast, is an upper-middle-income country with large room for catching up,” Molnar said. “On the other hand, the cases of the real estate booms, the sizes of the bubbles, and the extent of the burst differ quite significantly, owing, to a large extent, to differences in the economic systems and institutional settings.”

Molnar further pointed out that avoiding the “middle-income trap” is one of the major issues countries at that level of development should focus on. “Comparative research we did some years ago showed that China was among the best placed to avoid the middle-income trap due to its relatively large capital stock compared to countries with similar income levels, educated labor force, and focus on innovation.”