Inside China, "Risk of Falling into the Middle-Income Trap... Economy Must Return to Normal Track"

Warning from Scholar Participating in China's Economic Development Plan
"Economy Must Recover Quickly"
Authorities Ease Liquidity After Lockdown Policy Failure

[Image source=Yonhap News]

[Asia Economy Beijing=Special Correspondent Kim Hyun-jung] As China faces the worst COVID-19 outbreak in its history and is intensifying its quarantine measures again, voices within the country are increasingly expressing concerns about the urgency of economic normalization and the side effects of zero-COVID policy. Notably, a prominent economist who was deeply involved in China’s past economic development plans has also voiced worries about the ‘middle-income trap’ and called for market-oriented reforms.

According to the Hong Kong South China Morning Post (SCMP) on the 24th, Wang Yiming, Vice Chairman of the China Center for International Economic Exchanges, emphasized at an event hosted by the Hong Kong Monetary and Financial Research Institute the previous day that "China must restore its economy to a normal track as soon as possible to avoid falling into the middle-income trap." Wang served as Deputy Director of the Macroeconomic Research Institute under the National Development and Reform Commission, a think tank under the State Council, and was involved in formulating the five-year economic development plans from 2011 to 2015.

The ‘middle-income trap’ he warned about refers to the phenomenon where developing countries fail to advance to high-income status and remain stuck in the middle-income bracket or even regress to low-income status. According to the World Bank (WB), China’s gross national income (GNI) per capita was $11,890 (approximately 15.87 million KRW) last year, classifying it as a middle-income country. At the event, Wang claimed that next year’s economic growth rate could exceed 5%, but he set the condition that "the disruption caused by the COVID-19 virus must ease or cease." Given that daily new cases have consistently exceeded 20,000, this can be interpreted as implying that growth in the 5% range is practically impossible.

He stated, "Although the recovery momentum is weak, it is very important to bring economic growth back to a reasonable range," explaining that to achieve the economic goal set by President Xi Jinping at the 20th National Congress of the Chinese Communist Party in October ? "a minimum per capita GDP of $20,000 by 2035" ? an annual GDP growth rate of at least 4.73% is required.

[Image source=Yonhap News]

However, Wang warned, "It may be very difficult to achieve this due to population aging," and argued that "to avoid a dangerous situation where growth slows and the country can no longer generate economic momentum or become wealthier, it is crucial to increase productivity and stimulate market vitality." He added, "This cannot be achieved by simple counter-cyclical adjustment policies," and stressed the need to deepen reform and opening-up. As a representative example, he emphasized the need to reform the ‘hukou system,’ which restricts rural migrants’ access to public services based on their place of birth, to activate consumption.

Earlier, on the 20th at the ‘Caixin Summit’ held in Beijing by the local economic media Caixin, Liu Shijin, a member of the People’s Bank of China’s monetary policy committee, also argued that next year’s GDP growth rate should be set above 5%, stating, "The top priority now is to restore the macroeconomy to a normal track."

Also serving as Vice Chairman of the Economic Committee of the Chinese People’s Political Consultative Conference (CPPCC), he pointed out that weak growth negatively affects China’s labor force, productivity, and the yuan exchange rate, warning, "Even after the pandemic ends, losses in supply chains and employment will be irreversible." Considering the recent decline in China’s economic growth rate, he assessed that China’s per capita GDP is at the level of Japan in 1975 or Germany in 1971.

As concerns about economic slowdown due to zero-COVID policies deepen, China’s monetary authorities are expected to lower the reserve requirement ratio to supply liquidity to the market. On the 22nd, Premier Li Keqiang chaired a State Council executive meeting and stated, "We will maintain liquidity reasonably and sufficiently through monetary policy tools such as timely reserve requirement ratio cuts," signaling a response to the economic crisis caused by the economic downturn. This is interpreted as a measure to address the 0.5% year-on-year decline in retail sales growth in October and the resulting consumption slump.

Meanwhile, China’s third-quarter economic growth rate rebounded to 3.9% year-on-year, up from 0.4% growth in the second quarter. However, the growth rate for the first to third quarters was only 3%, falling significantly short of the Chinese government’s initial target of 5.5%. The International Monetary Fund (IMF) recently lowered its GDP growth forecast for China to 3.2% in 2022 and 4.4% in 2023 in its World Economic Outlook.

This content was produced with the assistance of AI translation services.