The country’s productivity growth is expected to face headwinds.
The growth of the world’s second largest economy is set to moderate at an average annual pace of about 4.6% over the next ten years due to demographics, deleveraging, rebalancing from manufacturing to services, and less room for catch-up, according to an S&P Global Ratings report.
Although growth will slow, the report stated that the reasons are natural and mostly healthy. However, prolonged trade and technology tension with the US could make China's slowdown harder to manage.
Trade tensions may “both force and encourage” China to become more self-reliant, which would slow the pace at which China acquires, creates, and applies technology. Thus, its productivity growth is likely to slow, which S&P Global Ratings described as the economy's last remaining rocket booster.
"The more local China becomes, the slower it will likely grow," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings. "China needs to find ways to lift productivity growth given its demographic challenges. Technology, including foreign technology, can help with that.”
The country is still relying on foreign suppliers from some key technologies such as semiconductors and retains a strong competitive position across many other technology products.
S&P Global Ratings added that a base case for China's economy assumes broadly unchanged structural policies from recent years.
"If China tolerates the slower growth resulting from structural factors and refrains from excessive stimulus, then the economy's glide path can remain smooth," Roache continued.
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