Can domestic consumption help China escape the middle-income trap?

CCTV News

Can domestic consumption help China escape the middle-income trap

With the Chinese economy slowing, the country now faces the looming risk of being caught in the “middle-income trap,” a state when the country’s growth plateaus and eventually stagnates after reaching middle income levels.

Top officials from the world’s second-largest economy have been pointing towards deepening reform and boosting domestic consumption in order to ensure “medium-high growth”, thereby avoiding stagnancy amid the global economic slowdown.

Addressing the G-20 Summit in Antalya in southwest Turkey, Chinese President Xi Jinping outlined the country’s economic vision, emphasizing that China’s growth rate in 2015 would remain relatively high.

“China has the confidence and capability to maintain medium-high growth,” Xi told the G-20 leaders, adding that this confidence came from “its determination and actions to comprehensively deepen reform and build a strong endogenous dynamic.”

The Singles' Day Shopping festival sees sales number reaching about one hundred billion yuan in one day on November 11, 2015

The Singles’ Day Shopping festival sees sales number reaching about one hundred billion yuan in one day on November 11, 2015

China entered the club of middle-income countries in 2013, after its per capita GDP surpassed the $7,000 threshold. However, with growth continuing to slow, there have been questions raised as to how the country could avoid being stuck in the middle-income trap.

Analysts believe that if China can maintain at least 6.5 percent annual economic growth over the next five years, it would result in per capita GDP rising to $12,000. That, in effect, would allow the country to escape the middle-income trap, something that only a dozen or so economies have managed so far.

But faced with a sluggish global economy, which has aggravated domestic structural challenges, the country, as Premier Li Keqiang argued recently, needs more reforms and restructuring to boost development.

One part of the strategy that the government has been adopting is to encourage domestic consumption.

Already the State Council has announced that the country will widen market access for private investors and gradually reduce restrictions on foreign capital. The government has also said that it will work to improve the business and consumption environment through strengthened supervision, better intellectual property rights protection and crackdowns on fake goods.

In addition, it has promised to accelerate household registration reform, which will help people relocate to cities, in order to drive home sales and boost consumption of consumer durables.

A logistic station after the Singles' Day shopping frenzy is full of parcels to be distributed across the country

A logistic station after the Singles’ Day shopping frenzy is full of parcels to be distributed across the country

However, experts are arguing that much more needs to be done.

The current growth engines of labor, land and natural resources, capital and innovation are constrained by old institutions, said Jia Kang, head of China Academy of New Supply-side Economics, a private think tank.

Li Wei, an economics professor at the Cheung Kong Graduate School of Business, meanwhile, believes that it is important to downsize the government and let it play role of an enabler for China’s economic development, so that the market can take charge in resource allocation.