China – Rebalancing and Sustainable Convergence

The People’s Republic of China has experienced buoyant economic growth in the past decades, managing a remarkable convergence to advanced economies. The growth rate of GDP slowed down significantly after the outbreak of the global crisis, due to both cyclical and structural factors. Serious imbalances inherited from the pre-crisis growth model have emerged, challenging the sustainability of rapid economic convergence. In the ‘new normal’, China has been rebalancing its economy by emphasising household consumption, although the importance of the private sector needs to be further strengthened. To avoid the middle-income trap, China must raise productivity driven by domestic innovation, higher value added production and a more flexible financial system. Shifting to a more balanced and sustainable growth path requires the reduction of present imbalances, such as the remarkable regional disparities and the weaknesses of the Chinese financial system. This study highlights the criteria for successful convergence using the conclusions of convergence theory and the experiences of East Asian countries.