Seven challenges facing China’s economic transformation

Depending on your perspective, there are any number of difficulties facing China. We group our views into seven areas that can generally be viewed as structural constraints to China’s sustainable growth. Each of these areas has been a crucial driver in China’s past high growth. At the same time, they were achieved through various distortions to the operations of a market economy. We expect many of these distortions to be forced to correct by market forces. However, after 30 years of development, institutional inertia has been accumulated and major reforms are now required in order to unleash further growth potential.

Export-led model exhausted

China had relied on robust global demand and continuous gains in market share to boost exports and related activities in manufacturing and investment. China’s exports in 2011 were 104.8 times in USD terms or 454.4 times in RMB terms those in 1980, a CAGR of 16.2% in USD terms or 21.8% in RMB terms.

Nominal GDP growth was 16.2% in those 31 years. Export growth has intensified since China entered the WTO in 2001. In the decade since, export CAGR was as high as 20.3% in USD terms or 17.6% in RMB terms, compared to 15.2% in nominal GDP.

As a share of China’s economy, exports went from 8% of GDP on average in 1981-85 to 19% in 1986-95. The share surged to 28% in 2001-05 after China entered the WTO, and peaked at 30% in 2006-10. Then, the share declined slightly to 26% in

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