The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian

Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does
not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used
may not necessarily be consistent with ADB official terms.

Slowdown of the Chinese Economy--Pessimism vs. Optimism

Some comments on Lin, Wang and Morgan
Factors Affecting the Outlook for Mediumto Long-term Growth in the PRC
By Katsuji Nakagane (Professor emeritus of the
University of Tokyo)

New Normal stage of development

China has reached a new (normal) stage of
economic development following its
slowdown of economic growth
The Chinese economy has passed, or is
approaching a new turning-point, not
necessarily in the Lewsian sense
Driving force changes: from labor/capital to
TFP intensive, from export to domestic
consumption, from manufacturing to services

Two views of the PRCs economic future

Pessimistic views
Purely economic reasons
1) the end of demographic dividend and the coming
of aging society
2) overcapacity resulting from overinvestment,
collapsing bubble economies with huge bad loans
Politico-economic reasons
3) aggravating corruption bringing about political
unrest
4) income s leading to social instability
5) delayed structural reforms, particularly of SOEs
The Chinese crackup is coming? (Shambaugh)

 Optimistic views
1) technological progress and innovations
2) structural bonuses: e.g. narrowing ruralurban divide as a result of reformed hukou
system; privatization
3) gradual reforms under strong leadership
4) opened economy
5) still high saving rate

Two traps
1) Middle income trap
The authors are optimistic in the sense that
China will not fall into this trap. Since it is
following the path experienced by other
developed Asian economies
2) Transition trap
But what about the transition trap?

Road to economic reforms

World Bank and DRC predict that China can grow
until 2030, but if it could continue to make steady
reforms (see Table 1)
SOE reform as a symbol of economic reforms that
have to be implemented in new normal China
Potential growth resulting from privatization of SOEs,
as one of the structural bonuses (see Table 2)
Why and how difficult SOE reforms?
Vested interest within and surrounding SOEs

Table 1. Projected growth pattern assuming

steady reforms and no major shock

Table 2. Profit rates (profit/total assets) of

industrial enterprises by ownership (Han)
%
2005 2006 2007

5.54
6.28
6.82

6.44
6.98
7.81

6.99
7.88
9.48

6.02
6.75
7.59
/ 1.26
1.25
1.39

2008
4.8
5.81
7.35
7.23
10.94
9.33
6.8
6.86
2.28
1.61

Institutions matter
Institutionally underdeveloped China
Vague institutions lacking in judiciary
independence to generate corruption
Corruptive, but dynamic and sweeping
marketization boosting growth so far
No rule (pre-reform era) rule by law (postreform era) rule of law (in the future
direction)