China set to break key economic barrier despite trade war, but can it avoid the middle income trap?

Frank Tang

China’s is set to a break a key barrier of increasing per capita gross domestic product to US$10,000 despite the trade war with the United States, one of “two centennial goals” for creating a “comprehensive well-off society” by 2021.

In July, China claimed to much online controversy that its nominal gross national income per capita for 2018 was US$9,732, just shy of the five-figure sum which is a key milestone for the ruling Communist Party.

China's headline gross domestic product (GDP) growth rate dropped to 6 per cent in the third quarter of 2019, but according to calculations by the South China Morning Post, this will still allow China to reach the US$10,000 figure this year.

Officials, including Han Wenxiu, a deputy director at the Central Financial and Economic Affairs Commission, earlier stated that China has passed that psychological threshold in 2019.

The World Bank defines high-income countries as those with per capita gross national income (GNI) of above US$12,375, with China belonging to a large group of “upper-middle countries” where per capita GNI falls in the wide range of US$3,996 to US$12,375.

China’s second centennial goal is for it to become a “fully developed nation” by 2049, the 100th anniversary of the founding of the People’s Republic.

Beijing is keen for China to avoid the so-called middle income trap, a development stage where a country attains a certain level of income but then stagnates and remains at the same level because it cannot progress from low-cost manufacturing into hi-technology industries.

Ding Zhijie, vice-president of the Beijing-based University of International Business and Economics who was recently appointed to head a think-tank under China’s foreign exchange administration, said China still needs to work hard to avoid the middle-income trap due to the trade war with the US.

My previous study showed that China’s per capita GDP could reach US$12,000 as early as 2021 if there was no China-US trade friction. The timing will be postponed, but for two years at mo

Ding Zhijie

“My previous study showed that China’s per capita GDP could reach US$12,000 as early as 2021 if there was no China-US trade friction,” he told an event in Beijing earlier this month. “The timing will be postponed, but for two years at most.”

A core benchmark for a comprehensive well-off society, as defined by the Communist Party in 2002, was that per capita GDP should exceed US$3,000, a benchmark that was later updated to the goal of doubling GDP size and per capita income in 2020 from 2010.

“It is a significant figure and milestone,” said Ding Shuang, chief Greater China economist of Standard Chartered Bank, with Beijing’s records showing that China’s per capita GDP was below US$1,000 in 2000.

“Given the growth momentum, China will steadily move towards the high-income country threshold of US$12,000 or even US$15,000.”

In November, China announced that it has revised up its 2018 GDP based on the results of a new national census, making it easier for Beijing to meet the goal of doubling the size of the economy in 2020 from a decade earlier.

President Xi Jinping defined 2020 as a key milestone on the journey of realising his “Chinese dream”, which includes making China a “basically modernised socialist country” by 2035 and a “powerful” socialist country by 2050.

Li Daokui, a professor at Tsinghua University, wrote in an opinion piece published this week that China could double its middle income population in 15 years to 800 million.

“China’s middle income population size will double the middle class in US, European Union and Japan combined by then,” Li wrote.

At the same time, a mountain of debt, an ageing population and its increasingly fraught ties with the US are adding to concerns over whether China can join neighbours Japan and South Korea in the top tier, or fall into a status of “getting old before getting rich” to suffer persistent stagnation.

China now boasts one of the highest proportions of billionaires, but the country also has millions in absolute poverty living on less than US$2 per day, with many Chinese wage-earners bearing the brunt of the economic slowdown.

This was evident in July when the National Statistics Bureau claimed China’s per capita GNI for 2018 was US$9,732, and above the average level of other middle-income countries. This caused uproar on Weibo, China’s equivalent to Twitter, with some questioning “why am I not that rich?” or “why is my income way below that figure?”.

The rise of per capita GDP doesn’t necessarily mean higher income. We should not solely pursue the growth of overall economic size, but should try to tackle such structural issue

Liu Xuezhi

Liu Xuezhi, a senior researcher with the Bank of Communications, the country’s fifth largest lender, said price inflation and actual growth of disposable income should be considered when making such international comparisons.

“The rise of per capita GDP doesn’t necessarily mean higher income,” he said.

China’s personal disposable income was only 28,228 yuan (US$4,040) last year, official figures showed, below the level of the US (US$50,203), Germany (US$38,996) and Mexico (US$16,310).

“We should not solely pursue the growth of overall economic size, but should try to tackle such structural issues,” added Liu.

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