China’s goal of productivity growth faster than the overall economy hinges on rural education, innovation

China is in need of new sources of growth after the old growth model propelled by investment began running out of steam

Beijing laid out its plans in the draft of its 14th five-year plan for 2021-25 released last week at the ‘two sessions’ in Beijing

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Beijing laid out its plans in the draft of its 14th five-year plan for 2021-25 released last week at the ‘two sessions’ in Beijing. Photo: AP

Sidney Lengin Hong KongandAmanda Leein Beijing

Published: 5:15pm, 12 Mar 2021Updated: 11:58am, 13 Mar 2021

After breaking with tradition and opting to not set targets for economic and labour productivity growth for the next five years, the success of China’s vague goal of aiming for productivity growth higher than that of the overall economy hinges on a major improvement in rural education and innovation, analysts said.

Success of the direction laid out in the draft of China’s 14th five-year plan for 2021-25 released last week is also likely to depend on whether Beijing opts to turn to the private sector for help or relies purely on state-owned firms.

Even before Premier Li Keqiang delivered the government work report at the “two sessions”, Beijing was already aware that it needed to find new sources of growth with the old model propelled by investment beginning to run out of steam.

The growth of labour productivity, measured by gross domestic product (GDP) per worker, has remained high and in line with GDP growth over the past five years, owing largely to high investment. Last year, it grew by 2.5 per cent, higher than the overall economic growth rate of 2.3 per cent, according to the National Bureau of Statistics.

Yet, China’s productivity challenge remains as a broader measure of how efficiently an economy uses capital and labour, also known as total factor productivity (TFP).

The labour force will keep shrinking, at a faster rate, and deleveraging means slower investment and capital accumulation

Shaun Roache

“The labour force will keep shrinking, at a faster rate, and deleveraging means slower investment and capital accumulation. This has caused TFP growth to fall a lot in recent years – we estimate [its growth rate] was less than 2 per cent in the five years through 2020 compared to over 5 per cent a decade ago,” said Shaun Roache, chief economist for Asia-Pacific at S&P Global Ratings.

That estimate is not far from Beijing’s own analysis as in a joint report with the World Bank published in 2019, the Development Research Centre under the State Council said that the TFP growth rate had fallen to an average of 1.55 per cent between 2008 and 2017 – less than half the 3.5 per cent rate in the decade before the 2008 global financial crisis – with little improvement in recent years.

The slowdown in China’s productivity growth, which could create a bottleneck for growth in coming years, is on one hand inevitable as the labour force shrinks and the economy switches gears to services from manufacturing.