UNDP Report: China's Spectacular but Incomplete Rise

3.1.3 China's Development - Challenges and Reform Potential

Bearing in mind China's outstanding performance, China's new development stage is characterized by a downturn to its economic growth and intensive economic structure adjustments. The "new normal" has raised concerns the possibility of China being caught in a "middle income trap."

The incompleteness of China's rise is reflected in:

- A Distorted Real Sector

Firstly, there is too much reliance on imported technology with a lack of domestic innovation. China's public and private expenditure on research and development remains low. China's 2009 exports also only made up 67% of domestic value-added, the lowest among G20 member countries.

Secondly, closer analysis reveals a skewed industrial structure. Only 46.1% of China's GDP has been generated by the service industry. The overreliance on manufacturing has led to an over-investment in specific sectors and serious environmental degradation and high energy consumption per unit of GDP. 80% of China's grassland is experiencing degradation, and industrialized cities suffer from hazardous pollution levels.

Thirdly, China is suffering from a slowly declining population dividend. China's competitiveness on the global stage has largely been attributed to its cheap labor costs. However, due to its rapidly aging population, China is gradually losing its competitive advantage, and is being forced to pursue alternative means of achieving sustainable growth.

- Inefficient Financial Markets

China still has a long way to go towards liberalizing its interest rates and capital accounts. Large state-owned enterprises often take priority when seeking bank loans and other financial resources, whereas small entrepreneurs are hardly able to raise enough funds to establish themselves. The Chinese government is attempting to shift this with new measures

- Remaining Development Challenges

China still faces some challenges in the complete achievement of several MDG targets such as full and productive employment and decent work for all, especially for women and young people, universal access to reproductive health and in reversing the spread of HIV/AIDS.

The last, but probably the biggest, challenge for China in next future is ensuring environmental sustainability, in terms of loss of environmental resources, biodiversity, water and air pollution and urbanization. Reforms will centre on forging a unique country-level strategy towards achieving inclusive growth and sustainable development on a massive scale.