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Overview

Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 800 million people have been lifted 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 address 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 resource-intensive manufacturing, exports, and low-paid labor 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, and from investment to consumption.

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. 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 stable market expectations and a clear and fair business environment, as well as strengthening the regulatory system and the rule of law to further support the market system.

Given its size, China is central to important regional and global development issues. China is the largest emitter of greenhouse gases, with per capita emissions now surpassing those of the European Union, although slightly below the OECD average and well below 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, and its economic rebalancing will create new opportunities for manufacturing exporters but 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.

Following real GDP growth of 8.1 percent in 2021, growth is projected to slow to 5.0 percent in 2022. The forecast reflects rising headwinds: Domestic demand has slowed, and the global economic environment has worsened significantly with the war in Ukraine. In addition, COVID incursions have become more frequent and widespread. China is currently experiencing the largest COVID wave since the end of the national lockdown in March 2020.

In the face of these shocks, the authorities have announced a significant loosening of policy. The 2022 budget leaves room for a fiscal boost of up to 2.7 percent of GDP.  Risks are firmly on the downside and include a stronger than expected global slowdown, a longer lasting commodity price shock, and more severe financial stress among property developers. China also remains at risk of re-escalating COVID outbreaks, which could lead to significant economic disruption. In a downside scenario, economic growth could slow to 4.0 percent in 2022.

Over the medium term, China’s economy is facing structural headwinds given adverse demographics, tepid productivity growth, and the legacies of excessive borrowing and environmental pollution. In the face of these challenges, macroeconomic policies need to be careful not to exacerbate financial risks. Structural reforms are needed to reinvigorate the shift to more balanced high-quality growth.

An important element of such a shift is a reduction in the inequality of economic opportunities. The government has highlighted achieving common prosperity as a key economic objective but has not yet defined specific policies to reach this goal. More progressive taxation and a strengthened social protection system could protect the most vulnerable, reduce inequality and help boost private consumption as a driver of growth.

Last Updated: Apr 12, 2022

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