The latest act in its economic success story may see China achieve high-income status in 10 years, an unprecedented transformation for a country its size and one with far-reaching ramifications.
China’s transformation over the past 30 years can be illustrated in a number of dramatic ways: sleepy coastal towns turned high-tech manufacturing centers; Shanghai’s quaint riverfront sprouting an iconic skyline of financial might; its rise as a global economic powerhouse, second only to the U. S. Here is another way to look at it: China’s per capita gross national income (GNI) of $290 in 1985 had nearly doubled to $540 by 1995, more than tripled to $1,760 by 2005, then quadrupled to $8,100 by 2016, according to World Bank data. This unprecedented lift from low to middle-high income status is now set for the next stage of an even harder climb. In a new Bluepaper report that melds analysis and insights from its macroeconomists, market strategists and sector specialists, Morgan Stanley forecasts that “China will break out of the middle-income trap and join the rarified ranks of high-income society” attaining per capita GNI of above $12,500 by 2027—a defining moment in its economic journey. Skepticism abounds, and not without cause. Investors seem to be most concerned about the risks of a financial shock in China, similar to the Asian financial crisis in 1997-98 and the U. S. financial meltdown in 2008, which triggered a global recession, says Chetan Ahya, Morgan Stanley’s Co-Head of Global Economics and Chief Asia Economist. Of particular concern: China’s debt has risen from 147% of GDP in 2007 to 279% in 2016, a buildup that many fear is unsustainable. Reflecting their skepticism, investors now hold a decade-low underweight position in China equities, notes Jonathan Garner, Morgan Stanley’s Chief Asia Equity Strategist. Still, China has proven its mettle in the past. In the aftermath of both global financial crises—in 1998 and 2008—even as many market stalwarts faltered, China held fast as an anchor of economic stability. Ahya and Garner believe that it can avoid the worst yet again, citing three major factors: That said, “China has borrowed a lot from the future, and the payback will be in the form of a significant slowdown in growth rates, ” Ahya says. That slowdown is already under way. GDP growth has trended lower every year since 2010, when growth was 10.6%. From 2011-15, real GDP growth averaged 7.9%; Morgan Stanley projects an average real GDP growth rate of 6.1% from 2016-20, falling to 4.6% (2021-25) and 3.1% by the 2026-30. Managed correctly, however, that is precisely the trajectory China wants. “To continue its journey toward a high-income society, China will need to move up the value chain in economic activities, shutting down capacities in old, redundant industries, while fostering the development of new, high value-added economic activities in sectors such as healthcare, education and environmental services, ” says Robin Xing, Morgan Stanley’s Chief China Economist. Consumption and services will come to dominate the economic landscape. Indeed by 2030, China’s private consumer market will reach $9.6 trillion and account for 47% of its GDP, up from $4.4 trillion and 39% of GDP today. “The future Chinese consumer will be richer, older and more tech-savvy, ” says Angela Moh, who covers the consumer market in Asia, excluding Japan. By 2030, household disposable income will reach $8,700; the median age will rise to 43, and internet penetration will increase to 75%; compared to $5,000,37 years old, and 52%, respectively, in 2016. These trends will reconfigure China’s domestic market. that are already in play in mobile tech innovation, electronic payments and banking, and online shopping will accelerate, says Moh. “Considering that by 2030, about half of the population in China will either have grown up with a smartphone or be sufficiently tech-literate to benefit from the sprawling eCommerce infrastructure, eCommerce is likely to remain a key driver of China’s consumption, ” she says, adding that eCommerce is likely to drive growth in rural consumption in particular, as internet accessibility continues to improve.
