China Economic Update: 20 June 2016
China’s longer term growth prospects are dependent on a range of economic reforms – critical to supporting the broad based productivity growth necessary to offset the negative demographic effects from the country’s declining working aged population.
Short term volatility risks derailing China’s critical reforms – risking weakness longer term
- China’s longer term growth prospects are dependent on a range of economic reforms – critical to supporting the broad based productivity growth necessary to offset the negative demographic effects from the country’s declining working aged population.China’s progress on the reform agenda unveiled at 2013’s Third Plenum has been at best mixed – with some measures implemented, some partially introduced or delayed and others reversed in the face of economic volatility. Moody’s argue that Chinese authorities are favouring growth and stability ahead of reform at present.
- A shrinking workforce and rising older age dependency ratio increases the necessity to boost labour productivity – a significant challenge in a period of generally low productivity growth globally. Simply maintaining existing productivity would see China’s economic growth slow considerably in coming years, as the declining working age population contracts from growth.
- Increasing labour productivity is a complex problem, as it is impacted by a wide range of factors. We argue that the focus should be on building the quality and mobility of China’s workforce (via education and reform to the household registration system).
- In 2013 we expressed cautious optimism towards China’s broad reform agenda. The slow pace of reform is a major concern, given the increasing demographic pressure and the urgent need to increase labour productivity. Failure to boost productivity will result in medium term economic growth slowing considerably and China’s economy remaining constrained at middle income levels.
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