How Fast Can China Grow? The Middle Kingdom's Prospects to 2030

Abstract

Given its size and importance for global commodity markets, the question of how fast the Chinese economy can grow over the medium term is an important one. This paper addresses this question by examining the evolution of the supply side of the Chinese economy over history and projecting how it will evolve over the next 15 years. Using a Cobb-Douglas production function, we decompose the growth of trend GDP into those of the capital stock, labour, human capital and total factor productivity (TFP) and then forecast trend output growth out to 2030 using a bottom-up approach based on forecasts that we build for each one of these factors. Our paper distinguishes itself from existing work in that we construct a forecast of Chinese TFP growth based on the aggregation of forecasts of its key determinants. Moreover, our analysis is based on a carefully constructed estimate of the Chinese productive capital stock and a measure of human capital – based on Chinese wage survey data – that better reflects the returns to education in China. Our results suggest that Chinese trend output growth will decelerate from around 7% currently to about 5% by 2030, and are consistent with a gradual rebalancing of the Chinese economy characterized by a decline in the investment rate.