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40 years of China’s Reform Journey and Way Forward
- Over the past four decades (1978-2018), China has transformed itself from a low-income to an upper-middle income country, with an average annual GDP growth of 9.5 percent and a per capita income that has leapfrogged many other emerging economies’ from USD156 to USD8,827. At this juncture, China is poised to reach high-income status in the coming years with a per capita GDP of around USD22,000 in 2035.
- Pragmatism and flexibility in policy making have allowed the leadership to steer the path of reform and make steady progress despite significant headwinds along the way. In the first two decades of reforms (1978-1998), the country shifted gradually from the central-planning system toward market mechanisms to increase efficiency of resource allocation and boost growth.
- In the past two decades of reforms (1998-2018), China’s has integrated itself fully into the global economy while deepening reforms in more fundamental ways. The country’s entry into the World Trade Organization (WTO) in 2001 has helped to draw more foreign direct investment (FDI) into China, and catapulted it to “factory of the world”” China’s trade in goods in 2017 accounted for 11.9 percent of global trade, rising from 4.1 percent in 2001. Its stock of FDI grew from USD393 billion to USD2.0 trillion over the same period. Market-oriented reforms have been strengthened significantly, leading to the rapid growth of the private sector.
- For China, the economic reform and opening-up journey is still not complete. There are both opportunities and challenges ahead. Emerging opportunities include harnessing its ability to adopt and increasingly create new technologies, further developing a growing number of large homegrown private enterprises with global branding, continuing urbanization, using fiscal policy to facilitate and support supply-side reforms and improve inclusiveness, and finally, to strengthen regional integration.
- The challenges for China to transform itself into an advanced economy are nontrivial. These include population ageing, widening regional disparities and income inequality, high corporate sector debt and financial sector leverage, and environmental problems. External headwinds from trade and technology protectionism may persist into the medium term.
- To achieve a more sustainable path of economic development, policymakers have shifted the overall economic target from just speed of growth to quality of economic development together alongside safeguarding financial stability, and with a significant emphasis on preserving the natural environment.
Prospects for Deepening China-ASEAN Integration
- Over the past two decades, China and ASEAN economies have become more integrated, spurred by the development of regional production networks with China at the center and ASEAN countries as parts of supply chains.
- Prospects for broader and deeper integration in the coming decades are bright as China and ASEAN countries are natural partners with many complementarities.
- Trade in goods between China and ASEAN will continue to thrive, propelled by the increase in market size on both sides, greater cooperation in facilitating trade and enhancing connectivity, and continued relocation of labor-intensive and other types of manufacturing activities from China to ASEAN to as China moves further up the value chain and focus on its competitive advantages. As a share of China’s trade, China-ASEAN trade is expected to rise from 10.4 percent in 2017 to 16 percent in 2035. Similarly, as a share of ASEAN’s trade, China-ASEAN trade is expected to rise from 16.7 percent in 2017 to 20 percent in 2035.
- ASEAN’s tourism revenue is expected to grow rapidly from a further rise in Chinese outbound tourism. Not only is the number of Chinese tourists expected to grow from 24 million in 2017 to 104 million in 2035, the per-person expenditure of Chinese tourists in ASEAN will also rise sharply given that China’s per capita income is projected to increase by 2.3 times from its current level by the year 2035.
- Broader and deeper economic cooperation, in particular through the Belt and Road Initiative (BRI), will foster FDI flows between China and ASEAN. Furthermore, China’s portfolio investment in ASEAN is expected to increase once China opens up its capital account further to allow Chinese investors to diversify their portfolios and invest abroad.
- There is potential for greater usage of RMB for trade and investment in the region, which will benefit both China and ASEAN.
- While the path of rising mutual benefits ahead has been paved by considerable efforts from both sides, enhanced cooperation, including in strengthening the regional financial safety net based on deeper understanding of each other’s needs and socio-economic contexts is crucial moving forward.