China's Economic Outlook in 2020 and Beyond

Daniel H. Rosen (China Strategic Advisory)



Near-term China investment decisions and US trade and economic policymaking are influenced by competing views of China's longer-term outlook. Yet economic models of China's long-term growth are shaky, debatable and hence few in number. Official statements from China's leadership about long-term expectations, and more importantly about the composition of long-term economic growth, are even more scarce. The International Monetary Fund (IMF) compiles the World Economic Outlook (WEO) projecting a medium-term outlook for its member economies, including China, although that only looks out about five years. A highlight of interest in the WEO for China is the role of current account surpluses. These projections in turn guide some arguments about whether China's currency, the renminbi, is undervalued. But Beijing doesn't systematically offer its own competing prediction of the longer-term numbers.

However a projection of China's growth through 2030, in five year increments, is included in a major new World Bank report titled China 2030, written in partnership with China's Development Research Center of the State Council (DRC). A leading Chinese business paper, 21st Century Business Herald, reports that China's Ministry of Finance praised the study highly, and that it is fully supported by outgoing President Hu Jintao and incoming Premier Li Keqiang. Table 1 below reproduces the projections.

Table 1 China: Projected growth pattern assuming steady reforms and no major shock
Indicator 1995–2010 2011–15 2016–20 2021–25 2026–30
GDP growth (percent per year) 9.9 8.6 7 5.9 5
Labor growth 0.9 0.3 –0.2 –0.2 –0.4
Labor productivity growth 8.9 8.3 7.1 6.2 5.5
Structure of economy (end of period percent)          
Investment/GDP ratio 46.4 42.0 38.0 36.0 34.0
Consumption/GDP ratio 48.6 56.0 60.0 63.0 66.0
Industry/GDP ratio 46.9 43.8 41.0 38.0 34.6
Services/GDP ratio 43.0 47.6 51.6 56.1 61.1
Share of employment in agriculture 38.1 30.0 23.7 18.2 12.5
Share of employment in services 34.1 42.0 47.6 52.9 59.0

Source: Development Research Center of the State Council (DRC).

The full report is 500 pages, with five supplemental reports of up to 400 pages each. But the basic projections table alone provides juicy food for thought. Here are four cursory observations about the outlook embedded in the publication.

First and foremost, China's leaders expect their external surplus, mostly trade balance, to remain 2 percent of GDP through 2020, and to stay positive at least through 2025. That would mean a roughly $450 billion trade surplus in 2020, based on the GDP growth assumptions in the table. An external imbalance within 2 percent of GDP has often been considered reasonable in the context of G-20 talks about rebalancing. China will be on the verge of becoming the world's largest economy in this time frame, however, and it is not clear that China's G-20 partners would be willing to tolerate such a massive surplus in real terms, regardless of the GDP share. Certainly, this is not how policymakers at the White House have interpreted Chinese stated plans to "rebalance."

Second, on the subject of GDP, the model foresees average GDP growth of 8.6 percent to 2015, and 7 percent for the 5 years thereafter. These are higher figures than other growth accounting models (e.g., Perkins and Rawski) have forecast as possible period averages; but they are not wildly divergent. This suggests that by 2020 China will be growing at around 6.5 percent annually on average.

Third, in 2020 China's GDP (in current dollar terms, assuming 3 percent renminbi appreciation annually) will be in the order of $21.5 trillion. That would be an extraordinary gain over just 9 years, from today's starting point of roughly $7.5 trillion. That may or may not be greater than US GDP in 2020, depending on how well the United States performs in the interim.

And finally, it is notable that the projections foresee a very impressive, aggressive shift to domestic consumption-led growth in China. Consumption now is around $3.5 trillion; consumption in 2020 would be $13 trillion. Ten trillion dollars of new domestic consumption is almost another America's worth of consumption (of today) at the margin.

The China 2030 projections come with a big caveat—as found in the title to table 1, which is taken from the China 2030 report: "assuming steady reform and no major shock." Those are both dicey assumptions, although not impossibly so. Handicapping their likelihood is an ongoing effort that will keep economists and policymakers busy for a decade. But regardless of your view on those questions, this peek at what China's leaders think they've got under the hood is helpful and intriguing.

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