A Snapshot of China

The framework of a two-speed economy is becoming antiquated in a world of accelerating change and increasing complexity. But to speak of a “multispeed economy” is not especially helpful either. Instead, it is better to think of a mosaic, with hotspots of opportunity and black spots of no growth or slow growth. This commentary is part of our From Emerging to Diverging Markets series, which tracks these hotspots and the changes under way in the world's rapidly developing economies.

As the second-largest economy in the world and a key driver of global growth, China has provided reasons for optimism in spite of the recent negative news in emerging markets. Defying predictions by many of imminent collapse, China has continued to deliver above-average growth in recent years, although it is no longer generating double-digit growth. The slowdown is partly the result of the government’s plan to restructure the economy from one that is investment driven to one that is consumption driven. The new administration, which assumed power earlier this year, has made structural changes to the economy its key strategic focus.

China’s economic growth is driven by several fundamental factors:

• Well-Developed Infrastructure. China has been investing in infrastructure for a long time, and it is paying off. Vast areas of the country are now integrated into an economic zone and are linked together by dense networks of highways and high-speed rail. This infrastructure facilitates speedy economic development in the country’s interior, further unleashing the potential of regions that have yet to be transformed after 30 years of economic reform.
• Continuing Urbanization. By 2025, it is projected that 250 million additional Chinese will have moved to urban areas. This large-scale migration will not only support further infrastructure investment but also provide new opportunities for China’s huge labor force and encourage development of the service sector.
• A Rising Middle Class. The continual improvement of the economic well-being of China’s population is creating an enormous middle-income segment that the government hopes will support its economic-restructuring strategy. Domestic consumption as a share of GDP is still far below that of many of China's peers. The government has in recent years begun setting up a social safety net, particularly in health care. The aim is to increase the ability and willingness of Chinese consumers, who currently are among the world’s biggest savers, to open their wallets and spend more.

As a result of these advantages, China should remain an attractive destination for many multinational companies. Foreign direct investment actually rose 6.4 percent in the first eight months of 2013, compared with the same period last year. That is a clear sign of confidence among multinationals.

However, China will not be immune to the phasing out of quantitative easing in the U.S. Asset prices in China have been rising for the past five years, partly because of the availability of “hot” money. The emergence of nonbank loans is raising concerns about a possible domino effect throughout the economy once liquidity starts drying up. The rapid aging of China’s population, environmental issues, and growing labor problems and talent shortages could limit China’s growth over the long run. The new leadership is well aware of the challenges ahead and has already begun to tackle many of them.