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China’s Slow-Growth Opportunity

After four disappointing years, Chinese economists have come to understand that the economy’s growth slowdown is structural, rather than cyclical, meaning that China’s potential growth rate has settled onto a significantly lower plateau. But this may not be bad news.

BEIJING – After four disappointing years, Chinese economists have realized that slowing GDP growth – from a post-crisis peak of 12.8% in 2010 to about 7% today – is mainly structural, rather than cyclical. In other words, China’s potential growth rate has settled onto a significantly lower plateau. While the country should be able to avoid a hard landing, it can expect annual growth to remain at 6-7% over the next decade. But this may not necessarily be bad news.

One might question why GDP in China, where per capita income recently surpassed $7,000, is set to grow so much more slowly than Japan’s did from 1956 to 1970, when the Japanese economy, with per capita income starting from about $7,000, averaged 9.7% annual growth. The answer lies in potential growth.

Whereas, according to Japan’s central bank, Japanese labor productivity grew by more than 10% annually, on average, from 1960 to 1973, Chinese productivity has been declining steadily in recent years, from 11.8% in 2001-2008 to 8.8% in 2008-2012, and to 7.4% in 2011-2012. Japan’s labor supply (measured in labor hours) was also growing during that period, by more than 3% annually. By contrast, China’s working-age population has been shrinking, by more than three million annually, since 2012 – a trend that will, with a 4-6-year lag, cause labor-supply growth to decline, and even turn negative.

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