China 2030: building a modern, harmonious and creative high-income society, published by the World Bank in collaboration with China's Ministry of Finance (MOF) and the Development Research Center of the State Council (DRC), assesses China's medium-term development challenges to 2030 and makes policy recommendations designed to help China transition to the next stage of its development.

The World Bank's China 2030 report acknowledges the extraordinary feat that China has accomplished over the last three decades, transforming itself from a largely rural and impoverished nation to the world's largest exporter and manufacturer, and its second largest economy, but will China be able to sustain this performance over the next two decades? China 2030 is in no doubt that the influence of China on the global economy will continue to grow in the years ahead. 'Perhaps the most important global megatrend is the rise of China itself. No other country is poised to have as much impact on the global economy over the next two decades. Even if China's growth rate slows as projected, it would still replace the United States as the world's largest economy by 2030, and its share in world trade could be twice as high,’ the report states. Nevertheless China, the report argues, is coming to a crossroads. Thirty years ago Deng Xiaoping launched the reforms which set China on its current growth trajectory, and the report suggests that China has now reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for.

Can China transition to the next stage?

The report notes that China's growth rates are on a downward trend and predicts that its GDP growth will decline gradually from an average near 8.5 percent in 2011–2015 to around five percent in 2026–30. This is partly due to the difficult external economic environment (chiefly the eurozone sovereign debt crisis the weak US economic outlook), but it is also due to many structural, internal reasons highlighted by the report. As countries develop there comes a time when the old tricks no longer work. China was able to transition from a low- to a middle-income country by producing labour-intensive, low-cost products using technologies developed abroad. As it reaches middle-income levels, however, it is heading inexorably towards the 'middle-income trap’. Basically, the underemployed rural labour force diminishes and wages rise, eroding competitiveness. Escaping this trap is not easy – most economies in Latin America and the Middle East, the report points out, reached middle-income status as early as the 1960s and 1970s and have remained there ever since. As if that challenge was not enough, China also faces some fairly major 'structural’ challenges that have resulted from its struggle to join the middleincome club. Firstly, its breakneck development has placed considerable stress on the environment and has imposed increased pressure on the availability of natural resources. Secondly, income inequality in China has climbed dramatically over the past two decades, due largely to rural-urban differences in access to jobs, key public services, and social protection. Finally, all of these problems need to be addressed in the context of China's looming demographic challenge – the report predicts that China's old age dependency ratio will double in the next two decades and the size of China's labour force may start shrinking as early as 2015.

Band-aid solutions won’t work

Despite the challenges highlighted above, China 2030 argues that the PRC is well placed to join the ranks of the world's high-income countries. It points out that the country's economic development has swelled the ranks of the middle class and accelerated domestic demand. Moreover, it is located in a region of other growing emerging markets providing opportunities for growth. Nevertheless, the report warns that there are no temporary, quick-fix solutions to China's structural challenges – they call for considered policy reforms. If, for example, the government applies macroeconomic measures to stimulate the economy, rather than addressing China's economic structural problems, then inflation and instability could result. The report proposes six strategic directions for China's new development strategy:

1. rethinking the role of the state and the private sector to encourage increased competition in the economy
2. encouraging innovation and adopting an open innovation system with links to global research and development networks
3. looking to green development as a significant new growth opportunity
4. promoting equality of opportunity and social protection for all
5. strengthening the fiscal system and improving fiscal sustainability, and
6. ensuring that China, as an international stakeholder, continues its integration with global markets.

 

China has overtaken the US as:

 

China's projected growth pattern (assuming steady reforms and no major shocks)

 

China's structural challenges (in addition to its economic and demographic challenges)

‘China 2030’ is available free of charge from the World Bank's document archive (http://documents.worldbank. org/curated/en/home), enter 'China 2030’ in the search field to download the report. See this month's Viewpoint article on pages (26-27) for more analysis of the report's recommendations.