China’s Growth Seen Strong But Moderating, Unsustainable Long-Term

The Asian Development Bank’s latest update to its quarterly economic outlooks leaves China’s gross domestic product growth for the year unchanged at a forecast 9.6%. But it notes that the pace of growth has started to moderate and will continue to do so as the effects of the government’s fiscal and monetary stimulus wears off and recovery in China’s export markets in the developed world stays sluggish.

Despite exports being a net contributor to GDP in the second quarter this year for the first time since the onset of the global recession, the ADB is forecasting that China’s GDP growth in 2011 will slow by half a percentage point to 9.1% as those trends continue.

The ADB also reiterates the need to shift the economy from being driven by investment and exports to domestic demand.

Longer term, failure to decisively implement the agenda to rebalance the PRC economy risks jeopardizing the sustainability of growth. A greater emphasis on private consumption demand, as against the current investment-driven economic growth model, would promote longer-term growth and raise living standards. Growth in consumption has been limited by the declining share of household income in total income, while the shares of enterprises and the government have increased.

ADB economists believe that China won’t be able to sustain its current pace of growth over the long-term with its current development model under which a rising rate of investment is needed to maintain its target rate of economic growth. At some point investment will stop rising (even China will eventually run out of money) and growth will slow unless another source of demand replaces it. The ADB expects China’s average annual GDP growth over the two decades to 2030 to be 5.5%, compared to the annual average of 9.4% between 1981 and 2007, though it could average 6.6.% growth in 2010-2030 with greater rebalancing of its economy.

China’s growth since Deng Xiaoping opened the economy at the end of the 1970s has been a remarkably success, though its growth rates have been much the same as those of Japan and South Korea at similar stages of their economic development. China’s economy, however, is on a different scale to those of both its neighbors, which is what really makes the achievement so impressive. It is investment that has got it there, but won’t be able to keep it there alone. As even Prime Minister Wen Jiabao has said recently, “In the case of China, there is a lack of balance, co-ordination and sustainability in economic development.” How China finds its balance will shape the global economy over the next two decades.

This post was first published on China Bystander.

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