China's growth to average 4.6% over next decade: S&P

August 30, 2019

SINGAPORE -- China's economy will grow at an average annual pace of about 4.6% over the next decade, according to an assessment  by S&P Global Ratings. After four golden decades of growth, China's economy will slow due to demographics, deleveraging, rebalancing from manufacturing to services, and simply becoming richer, which means less room for catch-up, S&P says. And although growth will slow, the reasons are natural and mostly healthy.

"owever, prolonged trade and technology tension with the U.S. could make China's slowdown harder to manage.

"Opening up to foreign trade and investment together with market-led reforms unleashed productivity growth and fueled China's growth surges of the past four decades," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings.

Tension with the U.S. may both force and encourage China to become more self-reliant, which would slow the pace at which China acquires, creates, and applies technology. In turn, this would slow productivity growth, which is the economy's last remaining rocket booster. "The more local China becomes, the slower it will likely grow."

S&P Global Economics research shows a dramatic productivity outperformance by manufacturing and technology industries over service industries in China since 1980. The service sector has grown as a share of China's economy, but this has been achieved by employing more workers.

China can no longer rely on a growing labour force, however, with the working age population set to shrink over coming decades.

"China needs to find ways to lift productivity growth given its demographic challenges. Technology, including foreign technology, can help with that," Roache said.

China could surprise the world by both localizing and developing the advanced technology it does not yet produce rapidly, He added. "We do not dispute China's capacity to reach the tech frontier, on its own, at some future date. We do think this will take longer if it mainly relies on self-reliant innovation."

Roache says that while China still relies on foreign suppliers from some key technologies such as semiconductors, it retains a strong competitive position across many other technology products. For this reason, it is deeply embedded in global technology supply chains, which may be costly to move.

"A decoupling of the U.S. and Chinese economies will be painful for all parties concerned, and end-consumers in China's trading partners will eventually pay more," he said.