Can China Avoid the Middle Income Trap?

With its new five-year plan, Beijing aims to rebalance its troubled economy and forge a path to lasting national wealth.

BY DAMIEN MA-MARCH 12, 2016

China stands at a crucial moment in its economic development. After years of unprecedented breakneck growth, in 2015 China’s $10 trillion-plus economy expanded at its slowest pace in decades. China’s leadership must now encourage new engines of growth that will secure the country’s rise into the ranks of the world’s advanced economies — or else risk stagnating in the middle-income range, a fate that has befallen many other developing countries.

This may explain why China’s ongoing lianghui, or the “Two Sessions” — an annual legislative confab that’s more like a cross between the U.S. State of the Union and the White House Correspondents Dinner — seems more sober than before. Although celebrities such as basketball star Yao Ming and business tycoons were still seen rubbing elbows with high-powered mandarins at the Chinese People’s Political Consultative Conference (CPPCC) that began on March 3, the ensuing National People’s Congress (NPC) a couple days later took on added significance as it focused heavily on the beleaguered economy. This year’s meeting marks the launch of the 13th Five-Year Plan, a comprehensive vision for China’s economic priorities through 2020. Amid China’s growing economic woes, the new plan aims to prevent the country from falling into the “middle income trap” that, over the past 50 years, few developing countries have managed to avoid. In the new Five-Year Plan, Chinese President Xi Jinping and his administration are essentially declaring that they, too, can join the shortlist of countries that have bucked this economic history. But to do so, China must stop propping up traditional industries with massive loans, create an economy based on innovation and services, and, with a prematurely aging population, leverage existing human capital to participate in the new economy.

As part of the 13th Five-Year Plan, Beijing rolled out a GDP target of 6.5 percent to 7 percent for 2016. While Beijing chose to set a range rather than the usual fixed target, the key is that it has set a growth floor for 2016. Thoughmany remain skeptical that even 6.5 percent growth can be achieved, the target signifies that it’s full steam ahead toward one of Xi’s stated goals — to double the size of its economy by 2020 from 2010 levels. To achieve the goal, which is tantamount to a political mandate, growth has to average at least 6.5 percent through 2020. How that political mandate will be reconciled with economic reality is at the heart of the latest Five-Year Plan. It means the country must lay the groundwork to escape the middle-income trap. 
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