10/07/2021
Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 800 million people have been lifted out of poverty. There have also been significant improvements in access to health, education, and other services over the same period.
China is now an upper-middle-income country. It will be important going forward that poverty alleviation efforts increasingly shift to address the vulnerabilities faced by the large number of people still considered poor by the standards of middle-income countries, including those living in urban areas.
China’s high growth based on resource-intensive manufacturing, exports, and low-paid labor has largely reached its limits and has led to economic, social, and environmental imbalances. Reducing these imbalances requires shifts in the structure of the economy from low-end manufacturing to higher-end manufacturing and services, and from investment to consumption.
Over the past few years, growth has moderated in the face of structural constraints, including declining labor force growth, diminishing returns to investment, and slowing productivity. The challenge going forward is to find new drivers of growth while addressing the social and environmental legacies of China’s previous development path.
China’s rapid economic growth exceeded the pace of institutional development, and there are important institutional and reform gaps that China needs to address to ensure a high-quality and sustainable growth path. The role of the state needs to evolve and focus on providing stable market expectations and a clear and fair business environment, as well as strengthening the regulatory system and the rule of law to further support the market system.
Given its size, China is central to important regional and global development issues. China is the largest emitter of greenhouse gases, and its air and water pollution affects other countries. Global environmental problems cannot be solved without China’s engagement. Moreover, maintaining economic growth at reasonable levels has important spillovers for the growth of the rest of the world economy.
Many of the complex development challenges that China faces are relevant to other countries, including transitioning to a new growth model, rapid aging, building a cost-effective health system, and promoting a lower carbon energy path. China is a growing influence on other developing economies through trade, investment, and ideas.
The only major economy to achieve positive growth in 2020, China’s recovery from COVID-19 has been swift but uneven. Aided by the containment of the COVID-19 outbreak since March last year, and supported by accommodative financial and fiscal policies and resilient exports, China recorded 2.3 percent real GDP growth in 2020. While China’s GDP is expected to return to its pre-pandemic level by mid-2021, the COVID-19 shock has accentuated many pre-existing structural challenges. Imbalances in the structure of aggregate demand have re-emerged, as households increased savings, government support stressed investment, and external imbalances have widened. Public and private debt stocks —already high before the pandemic—have increased further. Vulnerabilities in fiscal, corporate, and banking sector balance sheets together with rising debt service costs could weigh on China’s growth, following this year’s strong cyclical rebound. These challenges require attention during the post-COVID recovery with short-term macroeconomic policies and structural reforms aimed at reinvigorating the shift to more balanced high-quality growth.
