Possibility of a Middle Income Trap in China: Assessment in Terms of the Literature on Innovation, Big Business and Inequality

This paper discusses the possibility of China falling into the so-called middle income trap in terms of three checkpoints: innovation capability, world-class big businesses, and inequality. Based on these criteria, our conclusions are as follows: First, China has increasingly become innovative and thus differs from other middle income countries. Second, China has many successful big businesses, a number disproportionate to its size. Thus, China differs from other middle income countries with few world-class big businesses, and the only qualification is that those big businesses are mostly non- manufacturing firms focused on such areas as finance, energy, and trading. Third, China faces great uncertainty in terms of inequality. Although several signs show that the Kuznets curve will come to represent China, as noted by the gradual reduction of surplus labor and rising wage rates starting in the coastal provinces, the Chinese are now facing new sources of inequality in China, such as wealth (including financial and real estate assets) and non-economic factors (including corruption).