China Economic Comment – October 2013

As the Chinese economy enters a transitional phase in its development, many are now questioning what this will mean for its future economic performance. The IMF recently examined a number of scenarios for how China’s recent investment driven growth model could unfold over coming years.

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As the Chinese economy enters a transitional phase in its development, many are now questioning what this will mean for its future economic performance. The IMF recently examined a number of scenarios for how China’s recent investment driven growth model could unfold over coming years. Under the worst case scenario, global demand is assumed to remain below pre-crisis levels, while a lack of reform means domestic demand in China fails to lift.  This will generate annual GDP growth of just 4% on average – well below the last decade’s average of 10½% (which would be a ‘hard landing’). A more optimistic scenario assumes that reforms can successfully encourage a more efficient allocation of capital and a more orderly rebalancing of the economy – implying annual average growth of 7% during 2013-30. The most likely outcome probably lies somewhere in the middle.

Nevertheless, there is still a significant amount of growth potential in China. This is apparent when we consider the fragmented nature of China’s economic development to date. The majority of China’s provinces still have a long way to go towards convergence with the more developed regions. This may take many years to do so, driving solid (albeit moderating) rates of economic growth for the foreseeable future. However, there is no guarantee that the convergence will be smooth. Some of the issues facing the economy are more pronounced at the provincial level.

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