After a generation of reform that took China from a stagnant economy to the world's fastest developing country, China's growth model has reached a transition point that requires significant structural adjustment, according to a new white paper issued by the Conference Board's China Center for Economics and Business.
The report, titled The Long Soft Fall in Chinese Growth, predicts annual growth in gross domestic product (GDP) will slow to under 4 percent over the next decade, compared with the current growth rate of 9.5 percent.
Andrew Polk, the resident economist at the China Center, developed a portrait of China today and outlined main sectors for foreign investors in a strategic overview of the white paper at an October 24 briefing in New York.
China is amidst a deep structural downshift, Polk said. At its core, the "soft fall" will be caused by a productivity crisis engendered by a confluence of maturation and political-economy factors.
Structural reform is needed, Polk said, but is politically very difficult, challenging the very core of Communist Party of China (CPC) governance methodology. The current "reform" underway is a re-direction toward a more traditional governance and economic management model, he added, and the Conference Board expects a "marketization" type of reform.
Polk predicted increasing regional disparities, credit tightening, real estate risk and mini stimulus will emerge over the next 18 months. For example, Gansu Province and Ningxia Hui Autonomous Region have relied heavily on real estate investments to boost local economies, while areas like Shanxi, Heilongjiang and Yunnan Miner are struggling.
Key reform imperatives to fuel growth include bringing credit markets under control, marketizing state owned enterprises and pulling the State or government out of business, Polk suggested.
"There is no debate about the desired direction: decrease the economy's reliance on credit-fueled investment, de-lever non-performing debt, consolidate massive industrial over-capacity, bolster both returns on capital and productivity growth, and promote household wealth and welfare accumulation and consumption," Polk wrote in the report. "Enacting reform policies to achieve these aims would not only elevate household consumption and private sector investment to be the key next-stage growth drivers, but also ensure that the transformation ultimately leads to more balanced and sustainable economic development from an environmental and societal perspective."
The Conference Board is a global, independent business membership and research association that provides market reports to member companies. The Board's China Center for Economics and Business is focused on highlighting investment opportunities for multinational companies through peer-group CEO Council sessions in China, webcasts, and research projects.
(Reporting from New York City)