China's strategy to beat middle-income trap

This is an early winter morning in Beijing. The air is frigid. It is still dark, save for the taillights of cars driving along a crowded elevated highway linking a suburb and the inner city, the beams stretching out of sight.

Streets are getting more jammed as a growing number of vehicles converge.

The entire scene, also seen elsewhere in other major cities in China, is an apt metaphor for its economy.

Pessimists tend to take any modest slowdown as a dreadful omen for China's future. They argue that its spectacular economic growth is nearing its limit and the country falling prey to the "middle-income trap" where some developing countries that have attained a certain income will be stuck at that level.

The doomsayers are right about staying alert on the danger, but they miss the big picture.

The Chinese policymakers have long been acutely aware of the threat of the potential "middle-income trap," and launched recently its own version of "national-income-doubling plan," among other reform measures, to steer China toward a higher-income economy.

In his keynote speech at the opening of the 18th National Congress of the Communist Party of China (CPC) held last month, Chinese President Hu Jintao said that urban and rural per capita income should increase in parallel with the GDP and double by the end of the decade.

"On the basis of making China's development much more balanced, coordinated and sustainable, we should double its 2010 GDP and per capita income for both urban and rural residents (by 2020)," Hu said.

It is the first time that China has detailed its objective on per capita income, an internationally accepted indicator for gauging people's living standards, in the country's blueprint for future development. Previous targets set at the 16th and 17th CPC national congresses merely called for the growth of GDP.

NOT JUST NUMERICAL CHANGES

Efforts to double per capita income involve more than just revising up numbers, it entails twin-front reforms: revamping China's growth model to sustain its economic progress and delivering a full-fledged income-distribution regime to secure more evenly shared prosperity.

"The case for reform is compelling because China has now reached a turning point in its development path. Managing the transition from a middle-income to a high-income country will prove challenging," said World Bank Group President Robert B. Zoellick.

According to the World Bank, China was already a middle-income country in 2011, with gross national income per capita reaching 4,940 U.S. dollars.

As labor and other costs contune to rise, some fear that China will slip into a dilemma between losing its competitive edge over lower-cost countries elsewhere and falling behind advanced economies in higher-value products, and suffer the same stagnation as some Latin American countries experienced in the 1980s and 1990s.

"To avoid the middle-income trap, China needs to focus on three aspects of policy response," said Justin Yifu Lin, former chief economist and senior vice president of the World Bank.

Those, he said, include promoting technology innovation, narrowing the gap in income levels, and ensuring "green" and growth go in parallel.

It's worth noting that Chinese policymakers have singled out seven strategic emerging industries as investment priorities in the 12th Five-Year Plan that covers 2011 to 2015.

The seven strategic sectors -- energy-saving and environmental protection, next generation information technology, bio-technology, advanced equipment manufacturing, new energy, new materials and new-energy vehicles -- highlight Beijing's resolve to move up into the value chain and improve energy efficiency.

The targeted sectors, contributing to about 2 percent of the GDP at the end of 2010, are expected to generate 8 percent of GDP in 2015 and 15 percent by 2020.

On the other front, many economists see income disparity as a pressing challenge, which Chinese policymakers have shown that they are ready to rise to.

"We should raise the share of individual income in the distribution of national income and increase the share of work remuneration in primary distribution," Hu said in the keynote speech at the 18th CPC national congress.

WORLD'S BUSINESS TOO

"China can avoid the middle-income trap," Lin said.

If the country cannot, the costs of the world's second largest economy languishing in the "trap" would be too colossal to calculate.

China has already become the world's largest auto market and the biggest manufacturer. Doubling the GDP and GDP per capita by 2020 will create a booming middle class in China. It will offer a promising market for goods from around the world.

With income rising, demand for all types of products and services will increase significantly. Chinese consumers, for example, will buy 44 percent of luxury goods sold in the world by 2020, up from 15 percent in 2010, according to the Hong Kong based investment bank CLSA Asia-Pacific Markets.

The more affluent Chinese people, with higher disposable income, will bring growing profits to both retailers and manufacturers in and beyond China, which in turn will help revive the slack global economic growth.

The Chinese policymakers have a big job ahead. But one thing is for sure: they will never stop trying to beat the middle-income trap and in the course they may change the fate of itself and the world at large.