A slight acceleration in Chinese economic growth at the end of last year is reinforcing the common narrative that China’s expansion is a threat to other nations, including the US.

The bigger danger over the medium term, however, may be a slowdown in Chinese growth, which appears to be more likely than most commentators realise.

China, after all, is fast approaching income levels associated with the “middle-income trap”, the point at which many other countries have moved from rapid to sluggish growth. This trap opens up for several reasons, including that economies expand disproportionately, at early stages of development, by shifting workers from agriculture to manufacturing. At some point, though, the gains from such shifts disappear, and new sources of growth are needed. China is nearing this point.

The middle-income trap typically occurs at two levels: $10 000 (R88 000) per capita income, and again at about $15 000. This is based on recent data assembled by economists Barry Eichengreen of the University of California, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University.

Chinese income per capita amounted to slightly more than $7 000 in 2010. At an average growth rate of 7 percent a year from 2010 onward, China would hit the lower threshold by 2015. And as the authors note, “slowdowns are more likely in economies with high old-age dependency ratios, high investment rates that may translate into low future returns on capital, and undervalued real exchange rates. These patterns will presumably remind readers of current conditions and recent policies in China.”

One thing that can help determine whether a country escapes the middle-income trap and continues to grow rapidly is its level of inequality, according to a recent study by researchers at the Chinese Academy of Sciences and Stanford University. More unequal societies, with less inclusive institutions, have greater difficulty sustaining growth.

Comparing nations that have escaped the middle-income trap with those that have become stuck in it, the researchers concluded that graduating countries had low inequality, with Gini coefficients of less than 40 percent. The Gini coefficient equals zero if everyone has the same income, and 100 percent if one person has all the income.

China’s Gini coefficient is about 50 percent and rising. “We are saying that if in the very near future China does not address income inequality and – even more so – human capital inequality, China will have to try to accomplish what no successful graduate has ever done since World War II: make the transition from middle to high income with high levels of inequality.”

What would be the consequences if China falls into the trap? According to Yasheng Huang, a professor of management at MIT, slower growth could destabilise China’s internal political economy. That, in turn, could prove to be the far larger risk for other nations.

Aaron Friedberg, a professor of politics at Princeton University, writes that a less prosperous China “may be a less effective competitor in certain respects, but it could also prove to be less predictable, more aggressive, and even more dangerous and difficult for the US and its allies to manage


Slower growth in China is not inevitable, but it is a greater – and more dangerous – possibility than many in the US may realise. – Bloomberg

Peter Orszag is the vice-chairman of corporate and investment banking at Citigroup.