China's Economy at an Inflection Point

The world's second-largest economy is now at a strategic inflection point. China's National People's Congress, the country's legislature, on Mar. 14 approved the latest five-year plan. That will just add more momentum to the ongoing structural changes in China's economy, which will almost certainly grow at a slower pace in the next five years than it has during the past five. In his recent statements, Premier Wen Jiabao signaled the expected slowdown by noting that the official target for annual GDP growth during the next five years will be 7 percent, down from the target of 7.5 percent in the previous five-year plan. Our analysis suggests that, unlike earlier five-year periods, when the actual growth rate far exceeded official targets, the coming five years are likely to see a much closer alignment between the two.

There are several reasons for this. No. 1, there will be a sharp slowdown in the rate of growth in exports from China. With an average annual growth rate of about 20 percent over the past 10 years, China's share of world exports increased from 3.5 percent in 2000 to more than 9 percent in 2010, making it the largest exporter in the world. Continued growth at this rate would increase China's share to 25 percent by 2020, a political impossibility. A sharp slowdown in export growth rate is therefore inevitable.