China has yet to join the ‘rich country’ club. Has the middle-income trap been sprung?
- Predictions that China would reach the upper echelon of national incomes have yet to come true – and the gap has only widened in recent years
- Some analysts argue the goal can still be met, while others say even if it cannot be done it might not be as crucial as previously thought
In 2014, Justin Lin, a prominent economist and adviser to the Chinese government, projected that the country would reach high-income status by 2022.
While authorities have rarely touched upon the topic of the middle-income trap in recent years – a situation where a country stays at a certain income level and is unable to enter the ranks of the advanced economies – macroeconomic data suggests the subject cannot be far from mind.
With a gross national income (GNI) per capita of US$12,597 last year, China was more than US$1,000 behind the international threshold of US$13,845 defining a high-income country in 2023.
In comparison, in 2021, it was just US$100 away by the World Bank’s criterion – a per-capita GNI of US$12,551 compared to the US$12,695 requirement that year.
Comparing the journey to the high-income ranks to an 11km walk, Shi Lei, a professor of economics at Fudan University, said China has travelled the first 10km with vigour.
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“But the last kilometre might be a distance that it can never finish – it is different from any kilometre that it has walked,” he said. “This is not a simple maths question, and deserves our attention.”
But it is still within reach, economist Lin said during a seminar in Peking University last month.
“I estimate that we should be able to cross this threshold and become a high-income country as early as 2025 or no later than 2026,” he said, with the proviso GDP growth stays above 5 per cent. “This is an important milestone in the great rejuvenation of the Chinese nation.”
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Things look worse in the longer run in the IMF’s outlook, with growth predicted to fall to 3.4 per cent per year by 2028.
“If that happens, China will indeed find itself in the middle-income trap,” said Nouriel Roubini, a professor emeritus of economics at New York University.
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After over three decades of annual growth rates close to 10 per cent, the Chinese economy has slowed considerably in the years since, with the downward trend likely to continue as China faces problems that are “structural rather than cyclical”, he said.
Li Xunlei, chief economist at Zhongtai Securities, said the possibility of China being admitted as a high-income country is “almost zero” before its population drops to less than 12 per cent of the global total.
There is no need for China to pursue GDP growth to cross a threshold that is designed to keep it out
With a population of just over 1.4 billion, China’s becoming a high-income country would mean a third of all people in the world hold that status, Li said – but the World Bank has typically kept that rate below 20 per cent.
“There is no need for China to pursue GDP growth to cross a threshold that is designed to keep it out,” he wrote in January.
As long as China keeps growth over 1.5 to 1.7 times the global average, there is no need to worry about the issue, he said.
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As Zheng Yongnian, a professor at the Chinese University of Hong Kong’s Shenzhen campus, wrote in a 2022 book, “although the country is ‘wealthy’, its wealth is not ‘hidden among the people’.”
Though China has been the world’s second-largest economy since 2010 – with an average annual growth rate of 6.8 per cent in the period since attaining that rank, according to government data – its people have not gained wealth at the same pace.
In 2023, the average disposable income in China was slightly less than 44 per cent of the country’s per-capita GDP, according to official data. In the United States, this portion was about 76 per cent.
China’s GDP was about 65 per cent of the US last year, but per-capita GDP in the latter country was still 6.48 times higher.
Rural residents – who account for a third of the Chinese population – had a disposable income of over 21,000 yuan (US$2,897) in 2023, around 42 per cent of what their urban counterparts enjoyed.
“Even after it crosses the high-income threshold, the ranking is still low, and most people would feel that their income level is holding the country back,” he wrote in a research note last month.
China has moved up steadily, and has done many things correctly in the past … But China still has a labour force that is undereducated
If China uses the current per-capita GDP of Spain and Saudi Arabia as the standard for being “moderately developed” – US$30,000 in 2022 – it will need a compound annual growth rate of 6.8 per cent in the years leading up to 2035 to hit the mark, a milestone Xia said would be “very difficult” to reach.
“China has moved up steadily, and has done many things correctly in the past to keep moving. But China still has a labour force that is undereducated,” he said.
“There has never been a high-income country where less than 60 per cent of its labour force has a high school education or above.”
Portugal, Spain and Greece are the three countries that managed to move from middle to high income with relatively low human capital in the 1970s and 1980s. Around 50 per cent of their labour forces had attended high school at that time, but that transition came with support from the European Union, Rozelle noted.
Mexico, where less than 40 per cent of the labour force had been to high school, was admitted to the Organisation for Economic Cooperation and Development in the 1990s. The organisation is often dubbed the “club of the rich”.
But it is still classified as a middle-income country today, with economic growth averaging just above 2 per cent a year between 1980 and 2022, according to the World Bank.
