Managing the Middle-Income Transition
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Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.
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Chapter 2: Sustaining long-term growth: challenges and risks

Juzhong Zhuang, Paul Vandenberg and Yiping Huang


Despite remarkable progress over the past three decades, the economic success story of the People’s Republic of China (PRC) remains unfinished. It was only in 2010 that the country graduated from lower middle-income to upper middle-income status and it is still years away from attaining the high-income status of its East Asian neighbors and countries in the West. To make the transition beyond middle-income status, the PRC needs to address a number of challenges. This chapter identifies the six challenges most critical for sustaining a robust pace of growth in the coming years. Tackling them and putting the economy on a stable and more sustainable footing will require a change in the pattern of growth and investment. Three challenges focus on production and balance within the economy. First, technology and productivity gaps with advanced countries remain wide, although they have narrowed in recent years. Many exported goods are produced from foreign technologies and designs, with domestic producers focusing on assembly and less complex segments of the value chain, which adds only limited value. Second, wages and the costs of other factors of production are rising, causing the country’s low-cost advantage to erode. Third, critical imbalances exist in the sources of growth. Rates of investment and exports are high, yet domestic consumption is weak, and overinvestment may be leading to poor asset quality. Another imbalance is the promotion of industry over the services sector.

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