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Since China began to open up and reform its economy in 1978, GDP growth has averaged over 9 percent a year, and more than 800 million people have lifted themselves out of poverty. There have also been significant improvements in access to health, education, and other services over the same period.

China is now an upper-middle-income country.  It will be important going forward that poverty alleviation efforts increasingly shift to addressing the vulnerabilities faced by the large number of people still considered poor by the standards of middle-income countries, including those living in urban areas.

China’s high growth based on investment, low-cost manufacturing and exports has largely reached its limits and has led to economic, social, and environmental imbalances. Reducing these imbalances requires shifts in the structure of the economy from manufacturing to high value services, from investment to consumption, and from high to low carbon intensity.

Over the past few years, growth has moderated in the face of structural constraints, including declining labor force growth, diminishing returns to investment, and slowing productivity growth. The challenge going forward is to find new drivers of growth while addressing the social and environmental legacies of China’s previous development path.

China’s rapid economic growth exceeded the pace of institutional development, and there are important institutional and reform gaps that China needs to address to ensure a high-quality and sustainable growth path. The role of the state needs to evolve and focus on providing a clear, fair and stable business environment, strengthening the regulatory system and the rule of law to further support the market system, as well as ensuring equitable access to public services to all citizens.

Given its size, China is central to many regional and global development issues. Although not the main source of historical cumulative emissions, China today accounts for 27 percent of annual global carbon dioxide and a third of the world’s greenhouse gas emissions – with per capita emissions now surpassing those of the European Union, although slightly below the OECD average and well below the level of the United States – and its air and water pollution affects other countries. Global environmental problems cannot be solved without China’s engagement. China’s growing economy is also an important source of global demand. Its economic rebalancing will create new opportunities for manufacturing exporters, though it may reduce demand for commodities over the medium-term.

China is a growing influence on other developing economies through trade, investment, and ideas. Many of the complex development challenges that China faces are relevant to other countries, including transitioning to a new growth model, rapid aging, building a cost-effective health system, and promoting a lower-carbon energy path.

Amid multiple domestic and external headwinds, China’s GDP growth is expected to slow sharply to 2.8 percent in 2022, from 8.1 percent in in 2021. Wide-spread Omicron outbreaks and extreme weather have weakened economic growth. The external environment has also significantly worsened in the wake of Russia’s invasion of Ukraine, with global growth slowing, inflation soaring, and financial conditions tightening.

The property market slowdown, triggered by regulatory tightening that led to a liquidity squeeze for developers, has further weighed on economic activity. Housing demand remains subdued due to weak homebuyer sentiment amid repeated COVID-19 outbreaks and mortgage boycotts by owners of homes still under construction.

In response to these headwinds, the authorities have stepped up macroeconomic policy easing with higher public infrastructure spending, tax rebates, policy interest rate cuts, and a relaxation in local purchase restrictions in the property sector. However, resurgent COVID-19 outbreaks and associated public health measures have limited the effectiveness of policy stimulus.

Over the medium term, China’s economy continues to confront a structural slowdown. Potential growth has been on a declining trend, reflecting adverse demographics, tepid productivity growth and rising constraints to a debt-fueled, investment-driven growth model. In the face of these challenges, macroeconomic policies need to be carefully calibrated not to exacerbate financial risks. Structural reforms are needed to reinvigorate the shift to more balanced high-quality growth.

Last Updated: Sep 29, 2022


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