China’s middle-income trap

TEN years ago this November, the 18th Central Committee of the Communist Party of China (CPC) held its Third Plenum, outlining a series of far-reaching reforms designed to sustain China’s rapid economic growth. Around that time, a naive extrapolation based on the difference in growth rates between China and the US suggested that China’s GDP would overtake America’s by 2021. Some speculated that this could happen as early as 2019.

These predictions have been far off the mark. With the US economy outperforming expectations and the Chinese economy slowing, Goldman Sachs and others now estimate that China’s GDP may not catch up with that of the US until 2035, if ever. And even if it does, it would likely be only temporary.

China’s GDP is now projected to peak around mid-century, after which its shrinking labour force will offset any productivity gains.