Slow growth an opportunity, not threat

After four disappointing years, Chinese economists have realized that slowing GDP growth - from a post-crisis peak of 12.8 percent in 2010 to about 7 percent today - is mainly structural, rather than cyclical. In other words, China's potential growth rate has settled onto a significantly lower plateau. While the country should be able to avoid a hard landing, its annual growth is likely to remain between 6 and 7 percent over the next decade. But this may not necessarily be bad news.

One might ask why GDP in China, whose per capita income recently surpassed $7,000, is set to grow so much more slowly than Japan's did from 1956 to 1970, when the Japanese economy, with per capita income starting from about $7,000, averaged 9.7 percent annual growth. The answer lies in potential growth.

Whereas, according to Japan's central bank, Japanese labor productivity grew by more than 10 percent a year, on average, from 1960 to 1973, China's productivity has been declining steadily in recent years, from 11.8 percent in 2001-2008 to 8.8 percent in 2008-2012, and to 7.4 percent in 2011-2012. Japan's labor supply (measured in labor hours) was also growing during that period by more than 3 percent a year. In contrast, China's working-age population has been shrinking by more than 3 million a year since 2012 - a trend that will, with a 4 to 6-year lag, cause the growth in labor supply to decline, and even turn negative.