Premier proposes ‘double engines’ to help China escape middle income trap

Premier Li Keqiang delivered his keynote speech to the World Economic Forum in Davos, Switzerland, on Wednesday, suggesting that a more liberalized market and reformed government would become two important engines of China’s future economic growth. Making them work efficiently would help China avoid the curse of the middle income trap experienced by some Latin American economies towards to the end of the 20th century.

His key message was how China would do when faced with an economic slowdown and low quality economic structure. More importantly, as China has become a middle income country and its next ambition is to become a high income one, people are concerned whether the continuing economic slowdown may lead China to be trapped by the middle income curse.

Li did not answer this question straight away neither did he boost China’s great achievements in the past. He used his charm and humor at the beginning of his speech: “Davos is a beautiful town. In the past, it was famous for producing penicillin to cure lung diseases. Now, it is famous for providing an intellectual platform to cure brain diseases. Today’s world, in a difficult and complicated situation, implies that we now need a different kind of penicillin.”

In what followed he prescribed a new penicillin for China’s own problems. He used the term “double middle-high” as China’s medium term development goal. “Double middle-high” means that economic growth will change from high- to middle-high speed and economic structure will change from low- to middle-high quality.

He suggested that China had two choices, either to use “strong stimulation” as it did in the past to achieve high growth, or maintain middle-high level growth without “irrigating the soil with too much water”, a Chinese metaphor for uncontrolled quantitative easing. He immediately made his own choice, saying “we certainly opt for the latter”.

But how to achieve a middle-high growth and create an economic structure of middle-high quality is no easy task. What China will do is what Li wishes to share his view with the delegates at the World Economic Forum.

He suggested that China’s growth rate of 7.4 percent in 2014 was still the highest among the world’s major economies and this growth was achieved without strong stimulation. In addition, China created more than 13 million new jobs, the highest in history.

Li firmly indicated that China would not get into any regional and systematic economic or financial crisis. The inflation rate in 2014 was only 2 percent, meaning that there was room for some stimulating measures. In addition, 70 percent of local debts were used for infrastructure which provided an important base for further growth.

Li further suggested that China’s economic potential depended on its vast domestic market, hardworking spirits of 900 million workers, as well as proactive and good governance.

Finally, he used the concept of “double engines” for propelling China’s future growth in the next 10 to 20 years to help the country escape the curse of the middle income trap.