2

China’s Slow-Growth Opportunity

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.

Given the difficulty of reversing these trends, it is difficult to imagine how China could maintain a growth rate anywhere close to 10% for another decade, despite its low per capita income. But there is more.