In this episode of China Money Podcast, guest Yukon Huang, senior associate at Washington D.C.-based Carnegie Endowment and former World Bank China director, shares his observations on China's next leadership, the possibilities of any bold reforms and the Chinese economy's long-term trend in the coming decade.

Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.

Q: China's economy has been growing at an average of over 10% for the past twenty years. No economy can grow that fast forever. Third quarter GDP was out at 7.4%. Do you think the turning point has finally arrived?

A: Over twenty years, China has actually never grown lower than 7.8% for the annual basis. So it's very likely that, of course, this year's growth is likely to be lower than anything that has been experienced over the last two decades. But over the last month, there are some positive signs. Investment seems to be responding, or picking up. Retail sales is a little bit better. The export picture improved a little bit. So, some would guess, and I think it's probably true, that some time over the next month or two, the economy will bottom out, and will actually turn upwards.

But even a rebound will probably not lead to GDP growth next year much higher than 8%, because the global environment is still lackluster.

Special thanks to China World Summit Wing for providing a great venue for this interview

 

Q: Does that mean China is going to enter a phase where lower economic growth is the norm?

A: China's economy is a maturing economy, a middle-income economy. It's going to move to upper middle-income (economy). Ten or fifteen years from now, China will enter what you would call high-income (economy). You don't find high-income economies growing at 10%, or even 8%. A 5% or 6% is actually a very strong performance.

Why should China want to grow at a higher rate? Ten years ago, China wanted to grow at 9% or 10% because it had a major employment concern. But China today is quite different. It's an aging society. The labor force is already shrinking. So China doesn't need to grow very fast to generate jobs, but to create better-paying jobs with higher value. So now, it is the quality of the growth that matters, not the quantity.

Q: Do you see any chance that China might be growing at a rate much slower than 7%?

A: It's possible. Growth is determined by consumption and investment. Consumption has been growing at about 8% to 8.5% a year. Combined with the government, it accounts for about half of the economy. Investment grew double digits in the past, but has slowed down. It could only grow by 5% or 6% in the future. Suppose it grows at 4%, for example, and consumption grows at 8%, essentially this economy will be growing at 6%, which is too low.

So, the real trick is to continue to grow at 7% or 8% for another ten years. And then, I think we will see China's economic growth moving closer to 6%. But how do you grow at 7% or 8% for another ten years? The key is to increase productivity. China has been trying to improve productivity by innovation and technology. But these are generational changes, and can't occur in five or ten years. A more immediate method is to allow people greater mobility in moving around, or liberalize the Hukou system.

Q: Next month, China will have a once-in-a-decade leadership transition. What are some key policy initiatives the new government should take on?

A: The three choices that I would say are: 1, what is the role of the state in comparison of the role of the private sector; 2, what is the proper balance between banking and the fiscal budget; 3, the speed and pattern of urbanization in China.

For the role of the state and the private sector, the question is not which one should dominate. The key is to create a fair playing field so that the two can compete. For the second issue, the national budget is too weak.