In the process of moving towards developed countries, developing countries inevitably would go through the phase of middle-income traps. As China's economic growth and national wealth increase, it attempts to bypass the middle-income trap to become a developed country. This has also become China's national development goal. China stated in the report of the 19th National Congress that on the basis of building a well-off society, its next development should be carried out in two phases. The first phase is from 2020 to 2035, where basic socialist modernization will be realized. The second phase is from 2035 to the middle of this century, China will become a strong, democratic, civilized socialist modern power. Although the 19th National Congress did not mention China becoming a developed country, the nomenclature "modern power" actually implies this goal.
There are different views on whether China can bypass the middle-income trap. In 2010, such issue was raised in China, and has caused much heated discussions. Former Minister of Finance Lou Jiwei once analyzed that if no reform is done, a possible pessimistic scenario is that China has 50% probability to fall into the middle-income trap. Therefore, it is only through structural reforms, increasing labor productivity, and increasing total factor productivity that will enable China to get out of the middle-income trap. When talking about the Chinese economy, the Nobel laureate in economic science Michael Spence said that China is surpassing the middle-income trap and it needs to continue its structural reform for further development. If China wants to surpass the middle-income trap, it needs a higher level of human capital. It also needs the government to invest in science and technology, or to support investment in these areas, and achieve higher levels of innovation.
Chinese state-owned entrepreneurs are more optimistic about the middle-income trap than scholars. At the Summer Davos in Dalian on July 1, Ning Gaoning, Chairman of the Board of Sinochem Group, optimistically stated that the middle-income trap is not mentioned much now, and that China has surpassed it. He believes that the Chinese economy has gone through the industrialization that it has not been seen neither in Chinese history, nor in most other developing countries. After entering the phase of industrialization, the development of China's economy is no longer linked to environmental pollution, high energy consumption, and low labor costs, but is closely connected to technology and becomes a research and development drive. Many Chinese enterprises are pursuing industrial progress, technological advancement, and pursuing product competitiveness. They are putting themselves in comparison with other best companies in the world. These factors have made China surpassing the middle-income trap.
Can China really bypass the middle-income trap? In 2018, China's GDP reached RMB 90.03 trillion, according to the average exchange rate of the RMB and the US$ (RMB 6.6174 to US$ 1), a total of about US$ 13.6 trillion, with the GDP per capita reached about US$ 9780 (Chinese National Bureau of Statistics reveals that its per capita national income has reached US$ 9,732, which is higher than the average of middle-income countries). According to the IMF, China's GDP per capita in 2018 was US$ 9,630. Regardless if this was measured by GDP per capita or by the Human Development Index (HDI), China is still a middle-income economy. According to World Bank standards, China is a "upper middle-income economy" (US$ 3,976 to US$ 12,275 per capita). Based on the statistics in 2018, China is still a middle-income economy and has not surpassed the middle-income stage.
Concerning the issue of bypassing the middle-income trap, the decision-making authorities in China appear to be more direct in their understanding in this matter, and more objective as well, compares with the academic scholars. As early as November 10, 2014, when President Xi Jinping attended the meeting between APEC leaders and representatives of the Business Advisory Council in Beijing, he said that China will surpass the "middle-income trap"; the key questions are when this will happen and how China can be better developed after that. Xi Jinping said that China is confident to locate a balance between reform, development, and stability, as well as steady growth, structural adjustment, benefiting people's livelihood and promoting reform; its economy will be stable and far-reaching. Xi Jinping's statement gives two pieces of information: (1) China is still in the middle-income trap stage, though it will definitely surpass that in the future; (2) Even if China surpasses the middle-income trap, there will be problems in the future development. This means that after the surpass there will be more challenges. This differs with what some scholars have said, as even in the high-income stage there could well be a trap of stagnation.
As an independent think tank, Anbound's researchers believe that one should not underestimate the difficulty for China to surpass the middle-income trap. Historically, many countries in the world have tried to bypass the "middle-income trap", but most have failed. Countries that can stabilize the middle-income trap after the Second World War are rare. Technically there are 11 countries (Equatorial Guinea, Greece, Ireland, Israel, Japan, Mauritius, Portugal, Spain, Puerto Rico, Singapore, South Korea) that have entered the ranks of high-income economies, most of them are not stable in their subsequent performance. There are only four countries that are truly stable in high-income countries, and these are Japan, Israel, Singapore, and South Korea. After more than half a century of efforts in development, hundreds of other countries around the world are still unable to bypass the middle-income trap. Even if some countries are lucky enough to temporarily escape it, they would soon fall into the trap again.
Studies show that countries that have successfully escaped the middle-income trap have one common feature: there is a lot of technology transfer and technology absorption occurring in the process of surpassing the middle-income trap, and the resulting high-end industrial upgrading. It is worth noting that the aforementioned four countries are all beneficiaries of the U.S.' technology transfer. If China seeks to overcome the middle-income trap, it will be hard for the country to avoid the process of absorbing technology and upgrading its industry. Overcoming the middle-income trap will not be easy for China, and there are several factors to consider:
(1) The growth rate of per capita national income is slowing down. According to the World Bank standard of about US$ 12,000 per capita national income for high-income countries, if China maintains its growth rate in 2017, it will enter the ranks of world high-income countries around 2022. But as China's economy slows down, it will take longer to reach the target. If we take into account the national income distribution structure in the Chinese economy, it may take longer to reach the target.
(2) China's technological upgrading has not gone smoothly. Technological upgrading is an indispensable key condition for a country to become a developed country. The technological gap between China and developed countries is still rather large, and it will not be easy to catch up with the higher level and support the economy with advanced sciences and technologies. This is especially true with the rising tide of anti-globalization, as well as the trade and technological war initiated by the U.S. against China, it is more difficult for China to obtain technology transfer.
(3) China needs sustainable and effective institutional reform. Economic development and technological progress ultimately depend on institutional arrangements, especially after the fading of all kinds of dividend factors, new development impetus often comes from institutional reform. Objectively speaking, China's market-oriented reforms still lag behind.
Final analysis conclusion:
In general, China's development is advancing to surpass the middle-income trap, but to achieve this goal, China still faces many challenges, such as sustained economic growth, continuous technological progress, institutional reform, and the gap between rich and poor.
If these challenges are not well-managed, it would be extremely difficult for China to surpass the middle-income trap in order to reach the level of a developed country.
