Opportunities and threats – will China manage its third transition?

Abstract: Last three decades, China has experienced a stunning economic development, which has transformed the whole county on various levels. Until now, China has followed investment and export led growth and has become the world’s largest manufacturer. However, under the veil of rapid growth, social and economic imbalances have emerged causing a number of serious challenges facing China. Moreover, the China’s export and investment boom is expected to fall due to declining marginal product of capital and less comparative advantages pointing at rising wages and increasing prices on land. The theory of the Solow model and other economists suggests increased innovation and consumption driven growth in order to rebalance the economy and move up in the value production chain. However, domestic and global challenges may cause a drag on economic growth and deter a modernization process of the Chinese society. Many eyes are watching and a demographical change with an ageing Chinese population imply a limited window of opportunity. Furthermore, Governance framed by ignorance, passiveness and instability will give rise to social and political unrest. China is a diverse, and separated country. There is no definite answer whether a modernization process will succeed.