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China will be wealthier with proper reforms, says McKinsey&Co

China could generate an additional US$5.6 trillion GDP and US$5.1 trillion household income by 2030 if the country shifts growth model from an investment-driven one to a productivity-led one, McKinsey&Company said in a report today.

The current investment-driven economy leads to continued credit expansion and could lift banks’ non-performing loan ratio to 15 percent in 2019 from the official figure of 1.75 percent by the end of the first quarter, according to a research from the McKinsey Global Institute.

The asset quality deterioration would cost China 8.2 trillion yuan to handle bad debts, and the government-led investment could further distort resource distribution, hurting productivity and reducing the sustainability of economic growth.

“The old approach is clearly creating serious stresses,” said Jonathan Woetzel, director of the MGI. “Our new research reveals that China has the means to head off further problems -- and complete its journey toward being a fully-fledged advanced economy -- if it shifts to a new approach centered on productivity.”

More than US$5 trillion potential GDP growth and household increase can be unleashed as opportunities emerge from serving the growing middle class, the booming digital sector, technology innovation, improved operation efficiency, and more effective overseas expansion of Chinese companies, the research showed.

Woetzel said China’s supply-side reform should focus on improving the power of the market rather than strengthening the state-owned companies to help shifting to a productivity-economy.

The research showed that China’s private sector is vibrant, earning three times the return on assets of state-owned enterprises.

State-owned enterprises employed 60 percent of urban Chinese workers in the 1990s, but that has dropped to 15 percent in 2015.




 

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