China's potential growth to reach 7%-8% over next decade

WASHINGTON - China's potential growth will be at 7-8 percent range over the next decade, given the right kinds of reforms, said Nicholas Lardy, a senior fellow at the Washington-based Peterson Institute for International Economics ( PIIE) and a leading expert on China's economy.

According to the expert, China is the biggest economy in the world on purchasing power parity (PPP) basis, but China's GDP per capita is roughly one fifth of the US level, and given the right kinds of reforms, the potential for catch-up is substantial.

Lardy said at a recent forum held by the PIIE that there are a vast of disparities in levels of China's domestic economic performance as measured by productivity between the state sector and private sector. In service sector, the share of investment by the state firms is higher than private firms, but their returns on assets are only half of the private players.

"If they (Chinese authorities) follow through their commitment to ... open up large part of the service sector to private investment, there will be enormous potential for increase for productivity in service sector," said the expert.

At present, the service sector's output accounted for 48.2 percent of China's total GDP. The increase in the service sector's productivity will give a boost to the country's potential growth.

A latest International Monetary Fund study showed that, with China rebalancing its economy from investment-driven to consumption-led growth pattern, the productivity growth will increase gradually, partially offsetting the negative impact from aging population and lower capital output ratio.

According to Lardy, China's economy is now facing two big risks: sharp property market decline and the rapid credit growth.

However, the expert believed the slowdown in property market is a good thing as China has overinvested in the sector for quite some time. He suggested China should use this opportunity to push forward reforms, and shift the economy from investment-driven pattern to stable, efficient and consumption-led path.

The expert said China has made progresses in rebalancing its economy, listing evidences such as rising share of disposable income in GDP, slightly lower saving ratio, and rising share of private consumption in GDP. Rising consumption expenditure is partially offsetting the moderation in the growth of property investment, said the expert.

In regard to financial risk, Lardy said Chinese authorities have recognized the risk associated with rapid credit growth and have taken measures to slow the credit growth and strengthen regulations over shadow banking.

According to the PIIE, China will continue to slow gradually to 6.9 percent in 2015 and 6.7 percent in 2016.