How close is China to becoming an advanced economy?

China’s economy no longer expands at double-digit rates as it did a few years ago. Labour costs have been rising, and lower-cost countries are beginning to attract some of the manufacturing jobs that helped turn China into the world’s factory floor. A wealthy consumer class is developing to drive growth. And Chinese policymakers show aspirations to make state-owned enterprises more competitive and turn the yuan into an international currency.

To Gary Schlossberg, a senior economist at Wells Capital Management, these are the signs that China, like South Korea and Taiwan before it, is shaking off its middle-income status and becoming an advanced economy.

“They’re at that point where they have to make the transition,” Schlossberg said Thursday during a presentation at the American Institute of CPAs’ Doing Business in China conference in San Francisco, California. “Whether they can do it is still pretty much up in the air.”

If China follows in South Korea’s and Taiwan’s footsteps, the US and Europe would face more competition for resources and trade, Schlossberg suggested. The US dollar would carry less weight as a key currency, which could affect US economic policies such as sanctions. The New Development Bank that Brazil, Russia, India, China, and South Africa are in the process of setting up in Shanghai could become a financial institution that operates parallel to financial institutions in advanced economies.

Because of China’s size, the country’s transition to an advanced economy could affect the global economy significantly. But there are hurdles to overcome, Schlossberg said.

Other middle-income economies, such as India, parts of Eastern Europe, and Latin America, have tried to make the transition only to level out and get stuck in a holding pattern.

To track China’s progress, Schlossberg looks for the following:

• How well China contains its lightly regulated shadow banking system, which has allowed local governments to borrow excessively from banks.
• Whether China will be able to establish a system of social welfare benefits that are portable. Such a system is likely to lower savings rates and boost consumer demand.
• Whether the Chinese economy will continue to grow at a steady rate.
• How China will deal with an existing skills shortage and a labour force that is expected to start shrinking in a few years, a byproduct of the one-child policy.
• Whether China manages to achieve a soft landing for its overheated real estate market. Prices are declining in second- and third-tier cities, lowering household wealth and potentially dampening consumer demand.
• How Chinese businesses whose assets are in yuan will manage the large liabilities in foreign currencies they have built up, especially in US dollars, once interest rates in the US start rising again.

Related CGMA content:

“CEOs Put China at Top of Investment Wish List”: China is transforming from a low-cost labour market into the world’s largest middle-class consumer market, and CEOs are taking note. In a survey of CEOs from around the world, China emerged as the most attractive country for foreign investments.

“Mexico Rivalling China in Competition for Manufacturing Jobs”: Relatively low labour and energy costs are increasingly giving Mexico an edge over China, the low-cost manufacturer of choice for the past decade, research by the Boston Consulting Group suggests.

“US Outsourcing Grows in Tech Industry, With China as Top Destination”: More than three-fifths of finance chiefs in the US say their companies plan to outsource or manufacture products overseas, according to a new survey.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.