China is set to avoid the middle income trap in the next five to ten years as innovation and structural adjustment will create new fundamentals to support medium-to-high speed growth.
The middle income trap occurs when a country’s growth plateaus and eventually stagnates after reaching middle income levels. China became a middle income country in 2012 after its per capita GDP exceeded 5,000 U.S. dollars, according to the National Bureau of Statistics.
China’s per capita GDP was 7,575 dollars last year, and is estimated to hit 10,000 dollars in 2020. World Bank statistics show that only 13 of 101 countries and regions that have entered the middle income stage in the 1960s escaped the middle income trap.
This week, from Monday to Thursday, the fifth plenary session of the 18th Communist Party of China Central Committee is held in Beijing to discuss the 13th Five-Year Plan, China’s development blueprint for the next five years (2016-2020).
“The next five years will be a key period for China to deepen reforms along with global economic adjustments,” said Zhou Mi, an associate professor in economics at Nankai University in Tianjin Municipality.
After three decades of break-neck growth, China’s economy has begun to slow, with GDP growth dropping to a six-year low of 6.9 percent in the third quarter of this year, slightly lower than the 7 percent posted in the previous two quarters.
China is striving to move beyond its previous economic mode, which pursued growth at the expense of the environment. While the government has repeatedly assured medium-to-high growth will be maintained and China will not fall into the middle income trap, doubts on the prospects of the economy remain.
According to Zhou, China can escape the middle income trap in the next five to ten years through innovation and reforms.
The service sector must be improved and much work needs to be done to make this sector strong and competitive, she advised.
There are already plenty of signs of improvement. Beijing City on Tuesday relaxed restrictions on foreign investment in financing, travel, entertainment, health and medical insurance.
While national strategies such as the coordinated development of the Beijing-Tianjin-Hebei region, the Belt and Road Initiative and the Yangtze River Economic Belt, will go some way to support economic transformation, according to Zhou.
In the first three quarters, Chongqing Municipality in southwest China reported 11 percent growth year on year, the fastest among the 27 provinces that have released their economic data.
Zhang Fumin, deputy head of the Chongqing Statistics Bureau, partly attributed the good performance to the city’s high-tech industry.
“The new emerging growth drivers are making up for the decline seen at some traditional industries in Chongqing,” he said.
“The transition will not happen overnight, as we must wait for these new leading industries to become established and take the economy to the next level,” said Huang Yiping, a professor of economics at the National School of Development, Peking University. “And it will take more than a couple of years before they can begin to do so.”
Transforming the growth mode requires completing the transition to a total market economy, which requires successful reforms of state-owned enterprises, Huang added.
To avoid the middle income trap, a nation needs high-end innovation, according to analysts.
China is encouraging innovation and entrepreneurship to upgrade its growth mode and warm up the febrile economy, through policies to cultivate small businesses and tech startups.
To this end, Zhou said, enterprises should invest more in talent and time to really achieve their innovation potential.
Already a middle income economy, China cannot overcome the trap by simply relying on structural reforms and expanding domestic consumption, said Edmund Phelps, a Nobel Prize-winning American economist, at an innovation forum held in the eastern business hub Shanghai on Tuesday.
China needs to develop, and promote, its own approach to technological innovation, said the economist.
Innovation and entrepreneurship could generate more jobs, inspire creativity, boost structural readjustment and facilitate a medium-to-high growth of the economy, said Premier Li Keqiang in Zhongguancun, a major high-tech zone in Beijing last week.