China’s leadership transition is arguably the most important political event of the year. And it comes during a time of an economic slowdown and amid calls for political reform. In a Bloomberg View column, Peter Orszag, vice chairman of corporate and investment banking at Citigroup, writes that China’s incoming president Xi Jinping and China’s new leadership might have to cope with a substantial slowdown in the pace of economic growth in the years to come.
This is a great source of anxiety for investors that look the country as an engine of economic growth.
In the past China achieved rapid GDP growth as workers moved from the agricultural sector to factories. But this method of driving growth is said to be coming to an end, according to Orszag:
“The point at which moving workers from agriculture to manufacturing no longer leads to economic gains is called, in the literature of economic development, the Lewis turning point — after the Nobel-winning economist Arthur Lewis. If China is at or near its Lewis turning point, Xi will face an extraordinary economic challenge, with far-reaching geopolitical ramifications.
…The International Monetary Fund says that reality lies somewhere in the middle — that the Chinese economy will reach the Lewis turning point sometime between 2020 and 2025 — about the time when Xi’s term ends.
Even after that point has been reached, high growth is still possible — it will just be more difficult. Xi will face enormous political and economic difficulties. As my former colleague Larry Summers likes to put it, China represents a greatly leveraged bet on economic growth — and if growth is much harder to achieve, that bet may turn sour.”
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