With productivity decelerating, China’s economic miracle is over

CBA Senior Currency Strategist, Joseph Capurso, has produced a new research report arguing that “China’s economic miracle is over” owing to slowing productivity growth and demographic headwinds. This will drag China’s growth down “from around 6% currently to around 4% by 2030”:

According to Capurso, despite the slower growth, China may still escape the so-called “middle income trap”, although there are risks to the downside:

One implication of China’s middle income status is growth in productivity will decelerate… All growth in Chinese economic growth currently comes from productivity growth. At the same time, China’s ‘demographic dividend’ has morphed into a ‘demographic tax’ because the working age population is now contracting.

A further slowing in productivity growth, and capital accumulation, and a contraction in employment and hours worked will cut China’s economic growth prospects even further…

If its potential is reached, average Chinese incomes could reach high income status within a decade…

[But] China faces challenges that may reduce its productivity growth more than we assume. Its banking system is widely thought to be impaired with exposures to heavily indebted state owned enterprises…

China’s rapidly ageing population can divert resources away from productivity-enhancing investment in education and innovation to pensions and health care…

China stands out because its average income levels are well below advanced economies with similar age profiles…

Over the next decade, productivity growth will be the sole contributor to potential economic growth. Population and participation will detract more than 1pp from annual GDP growth…

We estimate productivity growth will continue to ease over the next decade. Our estimate for future Chinese productivity growth is benchmarked to the historical performance of Japan, Kore, Taiwan and Hong Kong… because China followed their export-led, investment heavy economic development model…

We estimate Chinese average hours worked will decrease modestly over the next decade…

We estimate the growth rate of the capital stock will decelerate from 9% in 2018 to 6% in 2030…

Combining our estimates of the TFP, the capital stock and the labour stock, we estimate Chinese potential economic growth will ease to 3.6% to 3.7% in 2030…

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