China is at a crucial inflection point in its economic and social development. It must continue on its path of development and push itself to the next level in order to become a self-sustaining high-income country and avoid the dreaded "middle income trap."

Chinese economist Zhu Min, chairman of the National Institute of Financial Research and former deputy director of the International Monetary Fund, spoke about the challenge China faces at his alma mater, Johns Hopkins University, in April.

The middle income trap is a state of stasis faced by countries that develop primarily through manufacturing. If these countries don't reform their economies to offer higher level services or products, some of them eventually lose their competitive edge when their wages rise too high. In 2011, Brazil hit the threshold defined by the World Bank as high income. Since then, however, Brazil has stagnated, its productivity growth hit a wall, and its GDP declined, causing it to fall out of the high income category. 

Besides Brazil, a number of other South American and Southeast Asian countries, including Chile, Malaysia, Indonesia, and Thailand, have run into problems of sustaining growth once they approached the high income bracket. Asian tigers such as South Korea, however, continued growing and moved up the value chain.

China is now on the brink of becoming a high income country, with a GDP per capita of approximately US$10,000 (not adjusted for PPP). In 2017, the World Bank defined a high-income economy as having at least US$12,056 GDP per capita. Zhu displayed a slide showing China's growth trajectory next to South Korea's. Up until now, the two have mirrored each other closely. But the question remains, will China be able to maintain its growth?

To do so and to avoid the middle income trap, China must innovate, increase productivity, create and invest in next generation industries, as well as foster higher domestic consumption within its growing middle class. 

China's current leadership is well aware of the urgency of this task and has set about to reform its economy. 

China still has room for increased productivity. Zhu's slides showed some industries, such as transportation, where China's productivity is still lower than comparable countries at the same level of per capita GDP. There could be potential growth opportunities there.

China also has opportunities for innovation in high-tech sectors. China already dominates in mobile payments and bike sharing. Two of the companies that have succeeded at producing 5G phones, Huawei and ZTE, are Chinese. Chinese AI companies captured close to 50% of the world's funding in 2017, according to CB insights. At a recent Intelligence Squared debate, most of the participants, mainly American journalists, strategic advisors, professors, and diplomats, agreed that "the next Silicon Valley will be in China."

Another high-tech sector in which China already appears to have a lead on is virtual reality. While in Nanjing, I witnessed first-hand how advanced China is in this field, with its numerous VR gaming studios where you can experience a truly immersive environment. There are far fewer VR gaming studious in the U.S. compared to China. According to a report by PricewaterhouseCoopers, the revenue generated by China's VR industry could exceed US$3.5 billion by 2021.

China is also home to the highest electric car sales in the world, hitting over 2.2 million cars by December 2018. China now accounts for well over half of all electric car sales in the world annually and the Chinese electric automaker BYD is now the world-leader in sales. With China's plan to eventually transition to 100% electric vehicles, there is great potential for further growth in the market.

It is not easy to reform the economy or to take the lead on new technologies, and China's success is by no means guaranteed. But with what China has accomplished thus far, with the industrious spirit of the Chinese people and its dynamic marketplace, I do believe China can escape the middle income trap with its continued efforts and intelligent planning.

Mitchell Blatt is a columnist with China.org.cn. For more information please visit:

http://www.ccgp-fushun.com/opinion/MitchellBlatt.htm

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