FEATURE ADDRESS

China’s growth is slowing due to structural issues, but government reforms are steering it towards a new phase of productivity-driven growth.

Growth is moderating as China’s economy moves into a new stage of structural adjustment.Slower growth, especially after GFC, is expected as the economy matures and shifts from factor (labour and capital) accumulation to efficiency and innovation. Rising aging populations, low fertility (1.3 nationwide; 0.6 in Shanghai) and past over-investment are structural realities, yet China’s GDP per capita—only one-sixth that of the U.S.—shows potential for further catch-up.

Government policies are working towards raising both labour supply and labour quality.The government is encouraging childbirth through subsidies, delaying retirement to match longer life expectancy, and expanding investment in education and technological innovation. These efforts will gradually strengthen productivity and sustain growth beyond the demographic dividend.

Building an integrated and equitable economic structure is essential to China’s development. The government seeks to build a unified national market that promotes fair competition, more efficient land use, and fiscal transfers to lagging regions, thus enabling regional convergence and shared growth.

Services, consumption, and market openness will drive the next growth cycle.

The service economy is emerging as China’s new growth engine. While prices in manufacturing remain weak, demand for services—from tourism and film to healthcare—is rising sharply. Services now account for 57 percent of GDP and nearly half of employment but remain well below the U.S. share of over 70 percent, with room to grow as income rises.

Government strategy emphasises innovation, domestic demand, and global engagement. There are four clear policy directions moving forward: 1) manufacturing will rely more on innovation, 2) domestic demand and services will lead growth, 3) Chinese factories will expand abroad to capture new markets, and 4) China will further open service sectors—including education, healthcare, and telecommunications—to international markets.

Public investment now targets people-centred and consumption-driven growth. Recent initiatives aim to lift household income, improve the consumption environment, and deploy RMB 300 billion in long-term treasury bonds to upgrade consumer goods and expand service capacity. The government is also promoting private sector and PPP participation in social and service sectors.

Urbanisation, regional mobility, and reform will unlock future productivity.

Urbanisation remains a key source of labour and economic expansion. Migration from rural to urban areas continues to raise employment in manufacturing and services. China’s urbanisation rate still lags that of countries at similar income levels, signalling ample potential for continued growth.

Regional policy encourages mobility and efficient allocation of resources. There is a need to promote the rational flow and efficient agglomeration of people and industries. Growing cities and central urban areas should strengthen their economic and population-carrying capacity, while regions losing population will specialize in areas such as ecological protection, food security, and border security – leveraging their comparative advantages to support national development.

Structural reforms aim to raise efficiency and ensure balanced development. Beijing is advancing market integration, optimizing land allocation, and providing fiscal transfers to lagging areas. Policies such as the Fair Competition Review and the “citizenisation” of migrant workers are designed to improve total-factor productivity and promote coordinated, high-quality urban and regional growth.

Quotes

“Investment in people will become more and more important. China used to invest in infrastructure and manufacturing, but now we must invest in people.”

“Agglomeration leads to equality rather than inequality. Different regions in China are seeing a trend of converging GDP per capita, even if people are moving further [into concentrated regions].”

“We need to deepen regional cooperation mechanism by building a unified, open and competitive orderly market for commodities and production factors.”
– Prof Ming Lu