The China growth story to 2020

China's growth story seems never-ending. However, average growth of 9% each year over the last twenty-five years cannot last forever. China's economy will mature, and its fast rates of growth will calm. Here we present our core growth scenario for the next fifteen years.

Economic growth is driven by three things: more capital, more labour and more productivity. Productivity is everything that allows more output to be produced with the same inputs (on which more below). Table 1 shows the contributions to GDP growth from these three components over 1971-98. China's economy has relied heavily on capital accumulation over the last 20 years, but in the future productivity growth will become more important.

Capital . Capital allows factories to be built and equipment to be purchased. Probably about three quarters of all the growth since 1978 has come from accumulated capital. China's growth is in large part due to it high savings rates. China has saved an average of 37% of GDP over the reform period. Successful firms have to save retained earnings since they cannot rely on bank loans or debt markets. People have to save for health, education and housing since these costs are increasingly borne by the individual rather than the state. However, China's savings rate will decline. China's rural households save much more than their urban peers, partly because public welfare provision in the countryside has always been extremely limited. Because of this, the household savings rate will undergo a secular decline as the country urbanises. They appear to have already started, with household saving falling from 21% of GDP in 1995-96 to around 18% today. Total savings rates remain high thanks to corporate savings. But as bank and capital market reforms make credit more widely available, healthy companies will be more prepared to take on greater leverage, and will save less too.

Labour. China's labour force is still getting bigger, but at a slower rate. China is still not fully urbanised. Officially about one third of its population lives in towns, well below the world average of 45%. The unofficial rate is probably a little higher since informal sector migrants need be counted. However, as idle rural labour migrates into the growing cities, and as industry spreads inland, more people will be drawn into the labour force. This will boost growth. However, the majority of the transfer has already taken place, meaning that labour force growth will contribute less to growth.

Productivity. Productivity is a bit of an unknown, given that it is an amalgam of lots of different things and is very difficult to measure. However, it is crucial, particularly for China in the coming years. As the 'easy' gains associated with capital and labour growth decline, productivity will have to take up more of the running. The consensus among economists is that China's productivity growth is currently running at around 2% a year, thanks to technology imports, lots of 'learning by doing', better education, more efficient financial institutions, more rule of law, and better infrastructure. Such things need to keep improving if productivity growth is to be maintained. This means serious structural reforms such as privatisation, liberalisation of the financial sector, investment in education and supporting the indigenous private sector, are required.

China's natural growth rate will gradually fall, from around 9-10% a year over the first two decades of reform, to 7-8% during the 2000-10 period, and to 5-7% over the following decade. This is our core growth scenario. Of course, each year's growth will vary as the fluctuations of the domestic economic cycle and global trends take effect. We are now entering a downturn in the cycle, but the evidence suggests it will not be long or deep. We expect GDP to grow by 8% in 2005, compared to 9.3% in 2004. Our near term growth scenario will be examined next week.