Since China’s economy entered the new normality, arguments about China’s future economic trend have been heard frequently. Particularly in the past two years when China’s economic downward pressure has increased, these arguments triggered pessimism in some Western media that “bad-mouthed China”, saying that China’s economy would “fall off a cliff”. However, since the first quarter of the year, China’s economy has run steadily and the overall economic situation is in line with expectations. Some economic indicators have improved and show an upward trend. Thus, some scholars think that China’s economy has hit bottom and will see a V-shaped or U-shaped recovery. But, the features of China’s potential economic slow growth, strong economic resilience and room for maneuvering suggest that China’s economy will take an L-shaped growth path in the future.
China’s potential slowdown in the future follows the intrinsic economic growth law. The major developed economies around the world, in wake of fast economic growth, have shifted their economic gears to a slow growth. Since the reform and opening-up, China has maintained, on average, around 9.7% annual growth for more than 30 years. Now, the factors that supported China’s fast economic growth have changed fundamentally.
1) The demographic dividend is waning. In recent years, the number and the proportion of Chinese working-age population continuously went down. In 2015, the ratio of the population from age 15 to 59 fell to 67.3 %. Meanwhile, the rich and low-cost labor resource of the rural-to-urban migrant workers has long backed up China’s fast economic growth and this resource has been largely maximized. Labor will become rarer and this will push up the overall wage level.
2) The savings rate will drop sharply. China had 222 million people over 60 in 2015, already accounting for 16.1 percent of the country’s population. The coming Silver Hair era will increase social consumption while lower the total social savings rate; presently, the nationwide social security system China is building will weaken people’s savings motive and the savings rate will show a downward trend。
3) The effects released by the systematic and technological dividends will weaken. Now, China’s reform has stepped into deep water. What China should do is to break through the system that has formed and consolidated for many years, and the interest barriers. The difficulties and obstacles encountered are unprecedented; China’s economy has fully absorbed and made use of foreign advanced equipment, technology and management experience in the process of opening-up. But, in the future, the improvement of the enterprises’ innovation ability will consume more energy and resources than the introduction of technology by simple “copying”.
Given the current economic growth, the foundation for China’s economy will not be stable and sound in the near term. Some inherent contradictions have not been resolved at all and new issues have occurred. The main foundation of a stable growth still hinges on investment, but private investment growth has slid considerably. From January to April, non-government investment only grew 5.2% and was 5.3% lower than the total investment growth, accounting for 62.1% of the total investment and showing a 3.2% year-on-year fall. A higher business risk, lower investment return, restrictive industrial access and bad financing channel have discouraged the non-government investment.
Whether the real estate market will maintain its fast growth is uncertain and the bubble risk is gradually increasing. Since the real estate market continued to roll out stimulus policies in 2015, real estate of the first-tier cities and some hot second-tier cities has been sold faster and at higher prices, propping up the economic recovery. Nevertheless, the prosperity of the real estate market strengthens the leverage of the residents and increases the bank credit risk on the one hand; it also imposes a greater pressure on the real estate market destocking on the other hand.
Meanwhile, the domestic economic differentiation further intensifies and some regions have difficulties in transforming and upgrading. Now, China’s economic operation shows a more obvious tendency of differentiation. The economy in the east coastal areas stabilized and picked up first on the back of the steady flow of new economy and new business formats, while the economy of the resource-based provinces in the northeast and midwest of China stagnated because of the problems like the rigid system and simple economic structure. If these provinces fail to complete the transformation and upgrading task, they will drag down China’s overall economic growth.
Thus, a potential drop of economic growth and the actual difficulty in short-term economic development will make it hard for China’s economy to have a V-shaped or U-shaped recovery. But the huge resilience and room for maneuvering will prevent China’s economy from “a cliff fall”. Instead, China’s economy tends to develop progressively. This is attributed to:
1) China still enjoys a late-mover advantage in economic development. China’s current per capita GDP is only about $8,000, far behind the World Bank’s standard for high-income countries.
2) The higher-than-average savings rate will last for some time. China’s national savings rate is still as high as about 46% now, obviously higher than that of most countries, and capital sources are abundant. At the same time, there is still a broad space for investments in infrastructure, like railway and underground pipe gallery, in environmental control, education, medical treatment, etc.
3) Improvement of human capital will generate a new dividend of talents. In recent years, the education level of Chinese employees was steadily enhanced. The capacity and health of the employees were also improved.
4) The development of new urbanization has released a new economic growth momentum. In 2015, China’s urbanization ratio was only 56.1%, much lower than 70% ratio of the developed countries. In the future, with more migrant workers becoming citizens, domestic demand will go up.
5) China still maintains a bigger interregional disparity. This interregional disparity provides a space and opportunities for the midwest region to take the industries shifted from the east region and materialize the progressive transfer and catching-up.
Therefore, during the possible slowdown growth in the future, China’s economy will constantly have to overcome contradictions and problems, as it explores new avenues for economic growth in recurring volatility. It means that China’s economy in the future will have an L-shaped progressive growth for a period of time. It will generally stay stable and move towards a more predictable growth rate, but will fluctuate and experience reverses within the short term.