Reform can help vault 'middle income trap'

After over 30 years of torrid growth catapulted China into the troop of the middle-income countries, the government is now facing an arduous task of avoiding prolonged stagnation experienced by many countries following similar increases in living standards.

China's gross domestic product (GDP) per person was around 6,000 U.S. dollars last year. By World Bank standards, this makes China a "higher middle income country", a phase where many countries such as Latin American economies are finding difficulty in sustaining growth.

This stagnation is usually identified by some economists as the "Middle Income Trap", and as China's economy gradually slowed down in recent years, it became questionable whether China could avoid the syndrome.

The economy grew 7.8 percent last year, the slowest since 1999. Growth in the first three quarters this year was also 7.8 percent, with analysts generally expecting less expansion in the fourth quarter.

In a clear response to worries over China's prospects, President Xi Jinping, when meeting with a group of foreign members of the 21st Century Council in Beijing last week, stressed that China is confident of achieving sustainable and healthy growth.

"There are sufficient internal factors supporting China's economic development. We are confident that the Chinese economy will keep growing in a sustained and healthy way," said the President, denying the possibility of any middle income trap.

Just days earlier, Premier Li Keqiang had spoken of a "golden balancing point": a fair economy that is both stable and sustainable.

Qiao Hong, chief economist for greater China at Morgan Stanley, said their remarks showed confidence in the strength of the economy, coupled with an awareness of what needs to be done.

"Their comments can also be read as a pledge to drive growth through deeper reforms and opening-up," she added.

Kuang Xianming, head of economic research at Hainan's Institute for Reform and Development, described some countries' failure to escape the trap on their inability to adapt to new dynamics that requires more sophisticated growth drivers.

The key for China to head off such a trap is to shift from reliance on investments and dividends brought by massive population and globalization to a new set of drivers led by the market mechanism, domestic demand and social development, where the potentials are yet to be tapped, said Kuang.

In light of China's current economic picture, analysts largely point to avoiding systematic financial risks, rebalancing the economy and unleashing growth potentials as major areas requiring further efforts, which all boil down to an urgency for comprehensive reform.

Action is already underway as China tries to restructure the economy: lending rates have been scrapped to further liberalize interest rates; the Shanghai pilot free trade zone is up and running; redundant administrative procedures have been slashed.

The leadership has on many occasions reiterated its commitment to rolling out more reforms to bring growth on an upgraded path.

Several days later, the authorities will meet for the third plenum of the 18th Central Committee of the Communist Party of China and a comprehensive reform package is anticipated.

If significant reform policies are made and carried out in the above-mentioned sectors, China is very likely to see fresh economic impetus that helps it vault the "Middle Income Trap" to proceed into the ranks of high income nations.

"Although growth is harder to achieve as economic volume expands and a population ages, China can still attain relatively fast growth through the more efficient use of human capital and production resources," noted Qiao Hong, suggesting China has the potential to attain annual growth of around 7.6 percent during the 2011-2020 period.