Analysis:
Our call:
By 2025, Beijing will have had little choice but to reform its way out of challenges that result in a Chinese economy that will likely become more open, balanced, and efficient.
China faces one of the most daunting external environments in decades, which ironically will likely push Beijing to further embrace foreign direct investment (FDI) and improve the business environment.
On the domestic front, China’s “internal circulation” agenda will be less about self-reliance but focus on improving productivity and inducing more local competition, while keeping a lid on financial risk.
The pursuit of reform priorities means that at the end of the 14th Five-Year Plan (FYP, 2020-2025), China will likely have eluded the “middle-income trap” and become a near-majority middle-class country.
Key assumptions:
Beijing will relearn some of the lessons from Deng Xiaoping by moderating its approach that balances improving its economic relationships abroad while improving its business and investment climate at home.
Beijing will continue to be hawkish on local finances as its main tool to induce reforms and local competition by forcing them to operate in a resource-constrained environment.
Leading indicators:
Sustained increases in FDI flows and portfolio investment for consecutive years, while annual surveys of foreign businesses in China show continued improvement and confidence in the business climate.
Local debt/GDP ratio stabilizes over the next few years.
Surpassing the high-income country threshold as defined by
the World Bank (~$13,000 GNI per capita).
