The Future is in the Past: Projecting and Plotting the Potential Rate of Growth and Trajectory of the Structural Change of the Chinese Economy for the Next 20 Years

• Author: Liheng Xu,Jun Zhang,Fang Liu
• DOI: http://doi.org/10.1111/cwe.12098
• Published date: 01 January 2015
• Date: 01 January 2015

21

China & World Economy / 21–46, Vol. 23, No. 1, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Future is in the Past: Projecting and Plotting the

Potential Rate of Growth and Trajectory of the

Structural Change of the Chinese

Economy for the Next 20 Years

Jun Zhang, Liheng Xu, Fang Liu*

Abstract

Based on the convergence hypothesis and referring to the experience of East Asian

high-performing economies from 1950 to 2010, this paper projects and plots the

potential growth rate of the Chinese economy over the next 20 years. It predicts that the

potential growth rate of per capita GDP adjusted by purchasing power parity averages at

6.02 percent from 2015 to 2035, while the potential GDP growth rate of 2015 would still be

above 8 percent, which implies that the realized rate of growth has not reached its potential

since 2012. Besides, based on the per capita GDP projected and on cross-country comparison,

the paper plots the trajectory of structural change of the Chinese economy from 2015 to

2035. The result shows that: (i) the value-added share of primary industry will drop more

rapidly than the employment share; (ii) the value-added share of secondary industry will

decline and employment share will present an inverted U shape whose turning point will

probably come between 2020 and 2025; (iii) both the value-added and employment share of

tertiary industry will increase continuously.

Key words: Asian economies, convergence, economic growth, structural change, the

Chinese economy

JEL codes: O10, O40, O47

I. Introduction

Following spectacular growth of approximately 10 percent on average from 2000 to 2012,

*Jun Zhang, Professor of Economics, China Center for Economic Studies, Fudan University, Shanghai,

China. Email: junzh_2000@fudan.edu.cn; Liheng Xu, PhD Student, China Center for Economic Studies,

Fudan University, Shanghai, China. Email: 12210680129@fudan.edu.cn; Fang Liu, PhD Student, China

Center for Economic Studies, Fudan University, Shanghai, China. Email: 12110680009@fudan.edu.cn .

The research on which the paper is based has been funded by the National Natural Science Funds for Key

Research Projects (No. 71333002) and the 2050 Projects of Shanghai “Pattern, cycles and dynamics of

China’s future economic growth and their influence on the development of Shanghai, ” to whom the

authors are very grateful. The authors are also grateful to Dr Zheng Yi from the Shanghai Li Xin

University of Accounting, who participated in discussion in the course of drafting this paper.

22 Jun Zhang et al. / 21–46, Vol. 23, No. 1, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China’s economy has seen a significant slowdown, with growth falling below 8 percent.

In 2014 the figure will most probably only get close to reaching the target of 7.5 percent.

As China’s GDP growth has shown an overall decline since 2007, there is currently heated

discussion among economists as to whether the potential rate of growth of China ’s economy

has fallen dramatically.

In the discussion about the long-term potential growth rate of China ’s economy,

researchers have largely focused on the importance of the diminishing demographic dividend

(e.g. Cai, 2010). However, given that the diminishing demographic dividend should have a

slow and gradualist effect on economic growth over a long period of time, there should be

some factors that lead more directly to the continued drop in China ’s GDP growth. Although

many are tempted to attribute the phenomenon to flaws in the institution or the economic

structure, there is as yet no cogent proof. Nevertheless, it is widely acknowledged that the

Xi–Li Administration has adopted overcautious monetary and fiscal policy since it took

office in 2012, which we believe is the direct cause of the dramatic economic slowdown.

One important reason for the government being so conservative in their macroeconomic

policy, of course, is the heightened systemic financial risks that were brought about by the

massive stimulus plan introduced by the Hu–Wen Administration in 2008 featuring

extraordinary credit expansion, which led to a rapid increase in local government and company

debts in the following years. Having obviously learnt a lesson, and also with an aim to

solve the problems incurred as a result of the stimulus package, the present government

has to curb further growth of credit and investment in the short term, which contributes

directly to the loss of speed in GDP growth.

If the abovementioned view stands, it would mean that China ’s GDP growth over the

past 2 years has fallen significantly behind its potential growth rate. In addition, if the

downturn is due to over-conservative monetary and fiscal policies in the short term, then

this sharp drop (to approximately 7 percent) is not the start of a transition to a stage of even

lower growth, although, in the long run, the potential growth rate of China ’s economy is

bound to decrease gradually.

Theoretically, the declining trend of the potential growth for an economy over the long

term is largely accounted for by the reduced speed of outward movement of the potential

production frontier. Investment growth will slow down as per capita income increases, and

the pace of technological progress will slow down as well, as the country moves close to

the frontiers. This phenomenon is called “convergence,” which forms the basic theoretical

framework for understanding the long-term trend of the potential rate of output growth.

The present paper uses the convergence hypothesis as the logic framework for

projecting and plotting China’s future potential rate of growth and evolutionary trajectory

of structural change for the next 20 years. In the context of the present paper, the definition