Dragons, Worms, and Why China's Slowdown Is 'No Reason to Panic'

Asian Development Bank Chief Economist talks with TIME Assistant Managing Editor Rana Foroohar about how China can boost growth amid rising wages and unfavorable demographics. (4 min., 19 sec.)

China’s GDP growth will slow from 6.9 percent in 2015 to 6.5 percent this year and fall further still to 6.3 percent in 2017, according to newly released projections by the Asian Development Bank (ADB). But that’s no reason to panic, says the bank’s chief economist.

“We argue that a gradual slowdown in the growth rate is entirely understandable, given the pattern of underlying fundamentals and structural factors,” said Shang-Jin Wei at Asia Society in New York on Friday.

Wei noted that China’s past “stellar” success was the precursor to its current economic struggles, since wages and living standards have increased substantially and sent low-skill industries to lower wage economies like Vietnam, Bangladesh, and India. This, he explained, is right in line with the trajectories of several of China’s more developed neighbors.

“Not long ago in Asia we had these four economies known as the ‘four dragons,’” Wei said, referring to Singapore, Taiwan, South Korea, and Hong Kong. “Today they are four worms in terms of their growth rates. That’s not particularly sad because that partly reflects the higher income status they have attained. Therefore, today the way they grow has to change — and the new way of growing intrinsically implies a lower growth rate.”

Wei also pointed to China’s demographics as contributing to its growth slowdown. Since 2011, the country’s workforce has been shrinking by millions each year — a trend exacerbated by the long-standing family planning policy that limited most families to only one child. From the policy’s full implementation in 1980 until 2011, China’s growth was boosted by a high population of young workers, coupled with the artificially low number of dependent children. But in 2011, as this cohort began reaching retirement age, the pendulum began to swing back hard in the other direction. “China has flipped from unusually unnaturally favorable demographics, to unusually unnaturally unfavorable demographics,” Wei said.

Last year, in a move to address its demographic imbalances, China relaxed its family planning policy and began allowing couples to have two children. But even if this sparks a baby boom, as the government hopes, Wei says that it will actually make growth performance worse in the short and medium term by creating extra dependents. “No family can produce a 20-year-old child right away,” he said.

As China aims to join the small club of Asian countries that have transitioned from middle income to high income economies, Wei says it will have to increase productivity to offset the losses brought on by rising wages and an aging population. In the above video clip, he discusses how China can do this through innovation and eliminating inefficiencies. Watch the complete program in the video below.

Watch the complete program:

Asian Development Bank Chief Economist Shang-Jin Wei talks with TIME Assistant Managing Editor Rana Foroohar about Asia's economic prospects. (1 hr., 22 min.)