China’s Economy

Introduction        

Since Deng Xiaoping’s reforms went into effect China’s economy has enjoyed more than four decades of rapid economic growth and is according to some projections going to overtake the United States of America as the largest economy in the world in nominal terms, as early as 2020. In fact measured by Purchasing Power China’s economy has already overtaken the United States. Therefore it would seem counterintuitive that one of the biggest challenges facing today’s China is the ability to avoid falling into the so called “middle income trap”. The “middle income trap” is a phenomenon in which an economy that has surpassed the low income level fails to make the transition to a high income economy, due to the fact that it can neither compete with the labor costs of low income economies nor match the highly skilled labor of the advanced economies. 

It is quite easy to forget that the second largest economy in the world is still a relatively poor country and ranks only place 85 in GDP per capita. According to the World Bank middle income economies are those with a GNI per capita of more than $1,045 but less than $12.476, China having surpassed a GNI of 4.125 in the year 2010 is now classified as an upper-middle income economy.

The Three Critical Transitions

According to Kharas and Kohli there are three critical transitions that a middle income country has to make in order to avoid falling into the “middle income trap”. These transitions are from diversification to specialization, from physical accumulation of factors to productivity-led growth and from centralized economic to decentralized economic management.

Specialization

China’s huge manpower pool has enabled it to become the factory of the world. However the growing wages of China’s workforce are already gradually eroding the cost advantage, making it increasingly difficult for China to retain its competitive advantage in low value added industrial sectors such as the processing trade. In order to compensate for the loss of the low cost advantage China should hence focus on selected industrial areas to reap the benefits of economies of scale. Kharas and Kohli postulate the need for a middle income economy to establish “national and global champions” able to compete internationally. To a certain extent this is already a reality in China for instance the search engine “Baidu” the B2B platform “Alibaba.com” and the social media platforms “Sina Weibo” and “Tencent Weibo” dominate their respective markets in China. However in many cases this dominant position was at least in part enabled by favorable regulations and protectionist measures of the Chinese Government such as the blocking of Google, Facebook and Twitter. It remains to be seen whether these national champions will be able to be equally successful on the global stage without the home turf advantage.