Is the Chinese “Economic Miracle” Over?

Is the Chinese “Economic Miracle” Over?

Updated February 28, 2016
Is the Chinese “Economic Miracle” Over?
Since initiating free-market reforms in 1978, China has
economy. Yet, many U.S. business groups contend that
been one of the world’s fastest-growing economies,
major economic reforms have not been forthcoming.
averaging 9.7% in real gross domestic product (GDP)
 China’s two main stock indexes, the Shanghai Stock
growth annually from 1979 to 2015 and lifting 660 million
Exchange (SSE) and the Shenzhen Stock Exchange
people out of extreme poverty, according to the World
(SZSE), rose by 54% and 119%, respectively, from
Bank. In 2014, China overtook the United States as the
world’s largest economy
January 5, 2015, to June 12, 2015, but then began to
on a purchasing power parity
experience sharp declines. By August 25, the SSE and
(PPP) basis, according to the International Monetary Fund
SZSE had each fallen by 43%. The Chinese government
(IMF).
heavily intervened to halt the slide, restricting stock
sales by firms and making large-scale purchases of
Over the past few years, however, China’s economy has
stock. The SSE and SZSE exchanges generally
slowed. Its real GDP growth was 7.3% in 2014 and 6.9% in
stabilized afterward, and from August 25 to December
2015, and is projected by the IMF to fall to 6.0% by 2017.
China’s merchandise trade, once the main engine of
31, 2015, they rose by 19.4% and 32.0%, respectively.
the
country’s
However, from January 4, 2016 to February 5, 2016, the
economic growth, also has stagnated. In 2015,
China’s
SEE and SZSE declined by 16.2% and 17.4%,
exports and imports fell by 2.7% and 18.4%,
respectively. The extent of the government’s
respectively over 2014 levels. China’s slowing economy
intervention added new doubts among many analysts
appears to have had a negative impact on the global
over China’s commitment to market liberalization.
economy, especially among countries that rely heavily on
commodities (e.g., oil and ores) trade with China.
 On August 11, 2015, China’s central bank announced
Figure 1. China’s Annual GDP and Total Factor
new measures to improve the market orientation of its
Productivity Growth (%)
daily central parity rate of its currency, the renminbi
(RMB). However, over the next three days, the RMB
depreciated against the dollar by 4.4%, which may have
contributed to increased volatility in global stock
markets. Some analysts saw the RMB devaluation as a
risky attempt to jump-start the Chinese economy.
 Many analysts contend that China’s efforts to boost
economic growth following the start of the global
financial crisis resulted in large-scale investments that
worsened over-capacity in many industries (such as
steel) and led to the accumulation of heavy debt by
Chinese firms, households, and government entities
(estimated by McKinsey & Co at $28 trillion in mid-
2014), which could, some argue, weaken the financial

Source: Economist Intelligence Unit (EIU).
sector and undermine future economic growth.
China’s slowing GDP growth rate has sparked a broader
Other analysts are more optimistic about China’s economy.
debate about the state and direction of the Chinese
They argue that China is transitioning to a slower, yet more
economy. Some analysts contend that China’s “economic
sustainable, economic model. But they note that China
miracle” of consistent rapid economic growth may be
needs to implement new economic reforms to be successful.
ending and that it could be heading toward a much slower
long-term GDP growth trajectory. Some even claim that
China’s Economic Model
current economic conditions in China may be worse than
China’s rapid economic growth over the past three decades
acknowledged by the Chinese government and warn that
can largely be explained by efficiency gains that resulted
China could be headed toward an economic crisis, based on
when it began to move from a Soviet-style command
a number of recent factors:
economic model (where the government controlled nearly

every aspect of the economy) toward a more market-based
In November 2013, the Chinese government announced
economy where market forces and competition played an
it would initiate new economic reforms that would let
increasingly important role in the distribution of resources.
markets play a “decisive” role in the economy. This
This was aided by China’s opening the country to foreign
announcement fueled expectations that China would
investment (especially in labor-intensive industries because
move to improve the business climate for foreign firms
China had a very large and underutilized labor force), a
and lessen the government’s involvement in the
reduction of trade barriers (especially after it joined the
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Is the Chinese “Economic Miracle” Over?
World Trade Organization in 2001), the expansion of the
countries (per capita GNI of $12,746 or more). Most other
private sector, and a significant reduction the state sector’s
countries that reached middle-income levels saw their GDP
role in the economy.
growth rates decline, largely because they were unable to
address structural inefficiencies in their economy or could
Economic reforms helped to generate unprecedented
not sustain productivity growth. China, now a middle-
economic growth in China. However, the government’s
income country, may be at a similar crossroads. For
approach has produced a number of significant problems:
example, China may be losing its advantage in low-cost
labor. Its working population has reportedly fallen for three
 Until recently, the government’s goal essentially was to
straight years (in 2015, it reportedly fell by 4.97 million
grow the economy as fast as possible regardless of the
people). A continued decline in China’s workforce could
cost to create jobs and boost living standards. This
drive up wages faster than productivity gains, thus
approach meant that the government was willing to
potentially slowing the growth rate of real GDP. China
tolerate such things as severe pollution, official
already has experienced a slowdown in total factor
government corruption, heavily subsidized industries,
productivity (TFP) growth in recent years. TFP grew at an
and growing income inequality—issues the government
annual rate of 3.6% from 2011 to 2015, compared with
now says threaten social stability.
6.6% average growth over the previous five years.
 Although the Chinese government sees economic
A New Economic Model for China?
reforms as vital to growth, it also continues to promote
Chinese officials appear to be aware of the economic
the role of the state in guiding economic development,
challenges they face. In 2007, then-Chinese premier Wen
part of which is to assist and protect Chinese industries
Jiabao said China’s economy was “unsteady, unbalanced,
and firms deemed vital to China’s economy.
uncoordinated and unsustainable.” China has indicated that
 Various policies have led to an unbalanced economic
it plans to rebalance the economy by making private
system. China maintains an unusually high level of
consumption (rather than fixed investment) the main driver
savings. Its gross national savings as a percentage of
of its economic growth. The government also is seeking to
GDP in 2015 was 48.1% (the U.S. level was 14.2%).
reduce the economy’s dependency on energy-intensive and
This is largely caused by the relative lack of a social
high-polluting industries and to encourage high technology,
safety net in China and limited investment options for its
green energy, and services industries. In addition, efforts
citizens. In addition, China has been heavily dependent
have been made to expand China’s social safety net (such
on fixed investment for much of its economic growth. In
as health care) to help reduce the need for high domestic
2015, China’s gross fixed investment as a share of GDP
household savings and thus boost private consumption. In
(at 42%) was higher than any major economy (the U.S.
2012, services output overtook industrial output for the first
rate was 16%), while private consumption as a
time, and in 2015, they accounted for 50.3% of GDP,
percentage of GDP (at 39%) was lower than any major
country (the U.S. rate was 68%).
Critics contend that while some economic rebalancing in

China has occurred, much more remains to be done to boost
Many products that say “made in China” are assembled
private consumption (while reducing fixed investment and
in China by foreign-invested firms, using imported
the high savings rate). Increasing the role of market forces
components. The value-added that occurs in China is
in the economy (and shrinking the role of the state sector)
often relatively small. China has relatively few global
and liberalizing trade and investment regimes are also
brands, and most of its largest firms are state-owned.
viewed as critical to boosting long-term economic growth.
China’s relatively weak enforcement of intellectual
propriety rights and government industrial policies that
Figure 2. China’s Savings, Fixed Investment, and
seek to promote “indigenous innovation” often are seen
Private Consumption as a Percentage of GDP (%)
as major innovation inhibitors for China.
The “Middle Income Trap”
Several developing economies (notably some in Asia and
Latin America) experienced rapid economic development
and growth during the 1960s and 1970s by implementing
some of the same policies that China has utilized to date to
develop their economies, such as measures to boost exports
and to promote and protect certain industries. However, at
some point in their development, several of these countries
began to experience economic stagnation (or much slower
growth compared to previous levels) over a sustained
period of time, a phenomenon economists described as the
“middle-income trap.” While several developing economies

transitioned to a middle-income economy, defined by the
Source: Economist Intelligence Unit.
World Bank as per capita gross national income (GNI) of
$1,045-$12,746 in 2014 (using average exchange rates,
Wayne M. Morrison, Specialist in Asian Trade and
adjusted for inflation), only a handful of countries (such as
Finance
Japan, Taiwan, and South Korea) have maintained rapid
IF10313
economic growth long enough to become “high-income”
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Is the Chinese “Economic Miracle” Over?

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