China Economic Comment – July 2014

The growth in China’s economy over the past thirty years has been extremely impressive, overtaking Japan in 2009 to become the world’s second largest economy. However when measured on a per capita basis, China’s economy still remains comparatively small – within the ‘middle income’ band.

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A falling working population increases the urgency of China’s economic reform

The growth in China’s economy over the past thirty years has been extremely impressive, overtaking Japan in 2009 to become the world’s second largest economy. However when measured on a per capita basis, China’s economy still remains comparatively small – within the ‘middle income’ band.

China’s growth momentum has slowed over the past few years, with the model of development – centred around investment and exports running out of steam. Experience from other developing economies shows that China risks getting caught in the ‘middle income trap’, where countries are unable to compete against lower cost rivals or reach the levels of wealthier economies.

In part, the reform agenda at last year’s Third Plenum was intended to address the middle-income trap concerns – which are heightened in China due to the demographic changes currently underway, a legacy of the long running One Child Policy. Restrictions to the country’s birth rate have skewed the population profile – both in terms of age and in gender, potentially limiting future economic growth.

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