What will China look like in 2030? That’s up to China, according to the World Bank. The global lender, along with the Development Research Center of China’s State Council, issued a joint report with a glimpse into the possibilities of China’s future.
The 468 page report, “China 2030”, contained a warning: free up the Chinese economy…or face a hard landing.
China has had, to say the least, an impressive run. The economy has averaged growth of 10% over the past three decades. Over 500 million people have been lifted out of poverty, and the country has become the world’s largest exporter and manufacturer.
And China has overtaken Japan as the world’s second largest economy.
But now, the country is at a ‘turning point in its development path”. And that turning point means it’s time for reforms, according to the report. China needs to transition to a freer system, if it wants to become a high-income economy and avoid the “middle-income trap” of slower growth.
Low-income countries can easily compete in global markets by producing low-cost goods. But as incomes rise, that competitive edge is eroded…and if increased productivity and innovation don’t take its place…the “middle-income trap” closes in. This is an easy trap to fall into (countries in Latin America and the Middle East reached middle-income levels in the 1960’s and 70’s and have been stuck since).
Until now, China’s current growth model has worked, but now that model is “unsustainable”. State-owned companies dominate the country’s strategic sectors like telecom, minerals and power…and account for 40% of economic growth. Now it’s time to weaken the grip of state enterprises, and redefine the role of the government. The relationship of government and the private sector needs to be transformed if China is going to “promote inclusive growth”.
The word “democracy” did not appear anywhere in the report…but it was clearly implied: “The expanding middle class is increasingly vocal in its demand to participate in the discussion of public policy”, and the government should “grant rights to individuals, households, enterprises, communities”.
But the World Bank doesn’t expect a “big bang” reform to happen. Changes will likely be slow and gradual. And even with steady reforms, and no shocks to the system, China will still see slower growth…with GDP averaging 6.6% a year through 2030.
Even with a ‘contraction’ to an enviable 6.6% average growth, China is still likely to be the world’s largest economy before 2030.
And today, China looks good. And I still see opportunity there; iShares FTSE China 25 Index Fund recently signaled a long-term buy, and the fund’s positive trend is well established.