Can China Adapt?

SHANGHAI – China’s “Two Sessions” – the annual gatherings of the National People’s Congress and the Chinese People’s Political Consultative Conference held every March – have always drawn global attention. But the meetings this year seemed particularly significant, owing not only to the country’s leadership transition, but also to its economic slowdown amid calls for deeper reform. How, then, will China’s new leaders respond?

The problem is simple: No one can predict accurately how long the slowdown will last. The authorities, lacking confidence in their ability to restore pre-2009 rates of annual GDP growth, have lowered the official target to 7.5%.

Many economists are becoming even more pessimistic, pointing to Japan as evidence that, after three decades, China’s breakneck growth may be coming to an end. Japan’s economy, they point out, achieved more than 20 years of sustained rapid growth; but, in the 40 years since 1973, annual growth has exceeded 5% only a handful of times, and output has stagnated for the last two decades.

But today’s pessimists need to account for some fundamental differences between the two economies. For example, Japan was already a high-income country in 1973, with per capita income (in terms of purchasing power parity) at roughly 60% of the United States’ level. The “Four Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan) experienced a slowdown in GDP growth at a similar relative income level. By contrast, China’s per capita income is only about 20% of the US level. In other words, we should not underestimate the Chinese economy’s potential to converge toward developed countries.