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OECD Makes Strongest Forecast Yet For China

The Organisation for Economic Co-operation and Development (OECD) is predicting strong economic growth in China over the next decade, according to a recent economic survey. They expect annual growth to average around 8 percent in this decade based on current rates of fixed asset investment, and assuming market reforms continue at the same pace. The biggest risks to growth? Rising inflation and falling export demand.

The OECD forecast tops the Chinese government estimate of 7 percent annual growth, and is one of the most optimistic for China in recent years. The document was particularly positive about investment spending, where there is major potential for improvement in rail and road capacity, and also in housing, which could continue to provide a productive outlet for Chinese investment dollars.

“There is significant scope of further catch-up in China,” the OECD Economic Survey of China said. “China has a strong record with respect to several of the key factors for sustainable growth and is well-positioned to emulate the record of earlier stellar Asian performers.”

The growth rate this year is expected to hit 8.9 percent – on par with the pre-crisis boom years and matching that achieved during China’s massive infrastructure stimulus package in 2009 and 2010. China is expected to surpass the United States as the world’s largest economy on a GDP basis by 2016.

China may still fall into a middle-income “trap,” however. Significant structural reforms are needed to rebalance the economy away from exports and avoid the inequity that has stalled economies such as Mexico. Growth in 2012 was only 7.8 percent, as demand for Chinese products fell in the United States and the European Union, putting a drag on growth.

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The Chinese economy suffers from a high inflation rate, an almost inaccessibly expensive housing market, and a stubbornly high savings rate. These factors depress domestic demand and make it challenging for Chinese firms to shift from an export-led model to one saving internal markets. To make this jump, China will need to continue significant reforms and allow wages to keep rising. Socially inclusive growth needs to be a top priority, along with financial market liberalization and increased competition in the service sector, according to the report.

The country also needs to improve protection of copyrights, reduce state ownership of companies, and address the issue of migrant workers who lack residency permits. China also struggles with serious pollution, which could damage productivity and be a potential source of political unrest.

From a manufacturing standpoint, the report sees China moving toward higher value items as wages rise, continuing trends seen in recent years in the garment sector. However, China is not forecast to become a service economy anytime soon, with manufacturing forecast to remain central to economic growth.