[MUSIC] What are the current challenges facing the Chinese economy? We know there are number of headwinds which are likely to slow the rate of economic growth in the future. The first is that there has been an excessive reliance on investment to drive economic growth instead of consumption. And the returns on those investments may start to decline, given how excessive it has been. Second, globally, in recent years, there has been a very sluggish recovery that has weakened demand for Chinese exports. We also know that China is now beginning to exhaust the opportunities from structural change. Most of the young people have already left the rural sector for the urban sector. In addition, China in many sectors is getting closer to the global, technological frontier. So that opportunities for catch up growth, by simply transferring global technologies to China or becoming less and less. China is also now facing a very rapid aging of its population. Which will definitely slow growth as fewer of the population are working actively in the labour force. This is a result of China's previous very strict one child policy. And China also may need to deal with the reality of limited resources globally. And a high inequality in China also poses challenges. There is some research which has suggested that high levels of inequality can actually be bad for economic growth. Here, we can see the population problem that the percentage of the population, over age 60, is going to increase. From around 10% to over 30% or a third of the population by 2050 or so. And similarly the age of 70 year olds and 80 year olds is also going to increase. This is going to put a lot more pressure on the workers or younger people in the economy to be productive. In terms of inequality, these figures show that over time the different measures from different sources of inequality have shown a very dramatic increase in inequality over time. The red squares to the upper right of this figure are from recent surveys that have been conducted nationally by different universities in China. And they all show gGini coefficients in the range of 0.52, 0.53. Where a Gini is a measure, where a higher Gini coefficient means higher levels of inequality. And a Gini of this magnitude makes China much more unequal than even in the United States. And in fact, one of the more unequal countries in the world. There's some evidence from official data, the purple triangles in this figure, that inequality has started to decline since the mid late 2000s. And it will be interesting to see whether this trend of reducing income inequality continues. How is growth likely to slow in future years? Many organizations have made estimates. These estimates in this figure are from a joint report by the World Bank and the Development Research Center under China State Council. And they predict that whereas in the 2011 and 2015 period growth was between 8 and 9%. That from 2016 to 2020 it's going to fall from something like 7%. And then after that the next five years it will slow to something less than 6%. And then down to something closer to 5%. So that by 2030 growth rates in China will be significantly lower than they are today. So growth will slow gradually in China under kind of a normal scenario. In terms the projected change in the structure of the economy. From this figure you can see that what is likely to happen is that investment as a share of GDP will fall. Consumption will increase. And then the importance of industry will also fall and be replaced by the grown of services. Now, can China become a high income country, a developed economy like other OCD countries? Even if China's growth slows to a rate which is significantly slower than it is currently, let's say to something like 6% or so per year. By 2030 China will have no problem becoming a high income country. And no problem in outstripping the United States in terms of economic size. Now, so it’s very likely that China is going to do it given its current rates of the economic growth. And there would have to be quite a collapse for China to kind of misfire and not become a rich economy. Still for China to get there more quickly, it will be important for China to avoid what others have described as middle income trap. What is the Middle-Income Trap? The Middle-Income Trap is a pattern of development where many countries grow fast. And they reach a middle income level. And then they just stagnate and don't ever make it to the high advanced country level. In this figure you can see where different countries fare in terms of their status, in terms of income per capita in 1960. And then their status in 2008 which is 48 years later. And you can see that there are a bunch of middle income countries in the middle box on the x axis. Which are still middle income countries in the middle box on the y axis. So they never escape. Only these blue circles are the successful countries that manage to grow from being a middle income country into an advanced country. And they include in Asia, Singapore, Taiwan, Korea and of course earlier, Japan. And then there are a scattered other cases but relatively few. China has started this period as being just at the margin really between low income and middle income. And already has risen to kind of above income level. They're aspiring to join those other blue dots in the coming years and become a high income country. To do so we will require that the role of government adapts to Chinese middle income status. So the advice of this joint report from the World Bank and the China State Council was that policy should focus on developing the private sector. Which, really, as we've seen, has been the engine of growth in the economy. To continue to emphasize the efficient functioning of markets and open competition. And to foster firms that are strong, innovative, globally competitive. And to try to play a supporting role in developing institutions that improve human capital and employment opportunities. Make the labor market as free and open as possible but then provide public goods that are increasingly intangible. So, these are those systems and policies and rule that promote efficiency, innovation, protect property rights, etc. Now what are the key economic reform issues other than kind of developing these intangible assets in the institutional landscape, there are a number of specific things that China needs to focus on. One, of course, is some macro-economic reforms. Interest rate liberalization is pretty much done. But needs to be followed up with greater exchange liberalization and eventual opening up of the capital account. To allow for a much more efficient use of financial resources and allow funds to find their highest return in the economy. And this may be accompanied by internationalization of the which will be advantageous to Chinese producers. The second is to reform the state enterprises. We know that productivity growth is very limited in this sector. And China needs to move ahead strongly and reducing their importance in the economy. It's important to help firms to upgrade their industrial structure. To react to the rising wages and other changes in factory prices. It's important to think about how to make the service sector a better driving force of economy as it becomes more important in the economy. To deregulate it, to allow more competition. And to think about policies that can better support growth in that sector. It's important for China to address some of the problems in the system of local public finance. Which has lead to kind of over development of land and a potential housing bubble in the economy. And, finally, China needs to continue to promote reforms, regional reforms that try to create a new standard of openness such as the Shanghai Free Trade Area. Which allows much more open financial flows into and out of this region. That can perhaps be a model for the rest of China. And of course, externally, China has embarked on a very major infrastructure investment and trade integration initiative in One Belt One Road countries. If China can make progress in all of these reform areas, it can help sustain growth momentum into the future.
