Is China approaching bubble territory? East Capital’s macro economist for Asia, Kristina Sandklef, looks at China’s prospects in light of the IMF's forecasts and the World Bank's China predictions.

China is facing a number of challenges to continue economic growth at the 8.1 per cent GDP growth recorded in the first quarter and avoiding stagnation. At the same time, China's restructuring toward a more consumer-based economy is going faster than expected.

The World Bank presented a report on China in the year 2030, which lists a number of reforms that must be implemented for China to avoid the so-called middle-income trap, where many developing economies have wound up in stagnation after a period of strong growth. However many of these reforms, such as research and development, are already included in the 12th five-year plan from last year.

Though necessary to avoid stagnation, sweeping reforms of state-owned companies that need adapting to the market, will be hard to implement.

No sign of a crash landing

Despite reports of how the Chinese economy is slowing down, there are no signs of a crash landing - and that ought not to be what we focus on either. Instead, we should give some thought to how we are going to handle China as the largest economy in the world.

The IMF forecasts that China’s GDP at purchasing power parity will surpass that of the United States as soon as 2016, something that a Chinese/Swedish study from the economist Christopher Ljungwall showed was most likely already happening in 2009, as the services sector was undervalued in previous GDP calculations.

Even though China is facing large and difficult challenges concerning its continued economic development, it is not unlikely that China will in fact succeed. One of its main driving forces is continued economic growth and increased welfare, which makes it likely that even painful reforms will be implemented. 

In addition, the recent political turbulence in China may pave the way for reforms, including the political reforms that Wen Jiabao himself has called for on a number of occasions, but also improved legal system and increased freedom of the press to restrain the spreading rumours in social media. 

We can't expect a fast revolution of any kind, but when we look back at China in ten years, it is likely that the country will have changed dramatically.