China's economy stands at a key juncture. This year, per capita GDP will likely reach $10,000. At that mark, economists generally would consider it to be a middle-income country. Those living in middle-income countries typically can satisfy their daily spending needs, but have limited disposable income.
China's per capita GDP has more than doubled since 2011 and increased 10-fold since 2000. This massive improvement in the living standards of a population of 1.4 billion represents one of the quickest economic success stories in history.
But as growth levels off from its blistering pace, the question is: will China's growth slow so much that living standards stop improving? Many emerging market economies have got stuck in the middle-income range. That is, their economies continued to grow, but not quickly enough that living standards for the average person reached those of people in rich countries. This phenomenon is known as the middle-income trap.
Today, China's middle class is large in absolute terms -- approximately 400 million -- but still only represents around 30% of China's population. By comparison, more than half the U.S. population is considered middle class. The average household net worth in China -- savings in deposits plus assets like property and financial investments -- is $230,000, less than a third of U.S. households.
The distribution of this wealth in both the U.S. and China is highly unequal, but overall richer U.S. consumers spend far more than their Chinese counterparts, especially on big-ticket items like cars. Car ownership per capita in the U.S. is roughly five times the level in China. To put it more starkly, the number of cars per thousand people in China is about where the U.S. was in 1926.
If China is to become a consumption powerhouse, like the U.S., it will need to avoid the middle-income trap. Other emerging markets have fallen into this trap for a variety of reasons. They have lacked the resources to make the necessary investments to move up the value chain, or rising domestic wages have caused a country to lose its competitive edge.
Some countries simply run out of labor as aging populations mean a slower-growing workforce, or their economies are over-reliant on highly cyclical industries like commodities.
Real GDP growth in China averaged 9.9% a year from 1981 to 2015, reducing the percentage of its population living in extreme poverty from 88% to 0.7%. In 2018, which was a low-growth year by China's standards, the real economic output in dollar terms over the year would have equaled 5.7% real GDP growth in the U.S.
Although China's overall growth will unquestionably slow -- we predict it will average 4.4% in the next 10-15 years -- there is reason to believe China will dodge the trap.
Encouragingly, two of China's East Asian peers have accelerated through middle income to their present high-income status: South Korea and Taiwan. However, these two economies had two tail winds to their growth from the mid-1990s onward that China will lack: much more rapidly growing workforces and a more supportive external environment.
China's economy is in the process of rebalancing away from its high-investment model toward one relying on consumption. Importantly, this consumer base is growing wealthier on the individual level and more diversified on the corporate level.
China has been active in promoting growth reliant upon a variety of industries, rather than putting all its eggs in one basket. These factors, combined with policy choices to ensure productivity gains, set China up for continued progress into the middle-income group.
Despite an unforgiving international climate and a rapidly aging population, 4.4% per annum real growth looks feasible for China over the next 15 years. This rate of growth will likely be enough to continue to lift living standards in China closer to those in wealthy countries, with per capita GDP in dollar terms rising into the upper $20,000 range by 2034.
China's progress toward higher-income living standards will be made easier by growth remaining relatively low in many richer countries. Average annual growth of 4.4% would sit comfortably above what we project for developed markets, which are likely to grow by an average 1.5% over the same 10-15 years.
These projections place China in the high-income group of countries by the mid-2020s at the latest. That achievement would likely result in another kind of rebalancing, with consumption representing a much higher share of GDP than it does today and a growth model less reliant on investment. Moreover, the size of China's economy in dollars would roughly match, or perhaps exceed, that of America within the next 10-15 years.
China's rise during the past two decades has exerted enormous influence on the global economy, reshaping supply chains, generating large-scale demand for commodities and creating hundreds of millions of middle-class consumers. Its challenge will be to continue expanding and enriching that class.
Hannah Anderson is a Global Market Strategist at J.P. Morgan Asset Management.
