Authors: Yang Yao and Mengqi Wang, Peking University

Amid declining growth rates, the debate about China’s growth potential has re-emerged. But one of the overlooked aspects in this debate is the crucial role of differing growth rates in China’s eastern, western and central regions.

China’s unprecedented growth over the last 30 years, particularly in the years before the global financial crisis, has been concentrated in eastern (coastal) provinces. The vast inland areas have largely lagged behind. In 2015, GDP per capita in the Eastern Region was 1.8 times that in the central and western regions. But since the global financial crisis, growth rates in the eastern provinces have slowed and the growth rates of inland provinces have picked up.

This unbalanced regional development could serve as a driver for China’s future growth. That is, while growth rates in the eastern region are decelerating, the two inland regions’ growth rates are still far from stabilising and likely to outperform that of the eastern region for the foreseeable future.

Analysis shows that a region should grow more slowly at high levels of GDP per capita and more quickly at low levels. For China, this means that the eastern region’s higher level of GDP per capita is associated with a slower growth rate than those of the other two regions. Hence, the lower GDP per capita — but higher growth rate — of the inland provinces could actually increase China’s growth rate of GDP per capita by 11.7 per cent in the next 15 years.

These high growth prospects for the two inland regions can be reached if they can improve their investment efficiency and long-run rates of technological progress to match those of the eastern region. This would help China sustain a longer period of high growth and offset the effects of the eastern region’s slowdown.

First, differences in the growth rates among regions can be attributed to their differences in investment efficiency. Unsurprisingly, the eastern region’s investment efficiency is higher than the two inland regions. But the magnitudes of the differences are not large. As a result, while investment efficiency plays an important role, China’s overall growth rate would not accelerate by much if the investment efficiencies of the two inland regions caught up with the level of the eastern region.

On the other hand, technological differences between the regions could greatly influence China’s future growth rates. Technological progress in the eastern region is the fastest, followed by the central region and the western region. Were the inland regions to catch up to eastern region technological advancement rates, they would be able to attain substantially higher rates of overall growth. Specifically, the central and western regions would respectively grow 4.7 and 4.8 per cent faster on average in the coming 15 years, leading to an average of 2.6 per cent increase in the national growth rate forecasted for 2016–30.

In short, unbalanced development and inequality among China’s three geographical regions could actually be a source of future growth, with improvements in technological progress rates playing the most important role in raising China’s overall growth potential.

To realise greater technological progress the two inland regions need to improve their institutional environments, as well as their stock and quality of human capital. One of the decisive factors in the eastern region’s success has been its exposure to the outside world. With this in mind, for China to sustain its high growth rates the eastern region needs to not only open itself further to the outside world but also to its inland counterparts.

At the same time, the inland regions need to drum up their efforts to improve their policy environments and attract capital and talent from the eastern region. The most important reforms include adopting a more rational regulatory framework and fostering a rules-based business culture. Providing affordable housing, good education for the next generation, an amiable work environment and preferential taxation will also help attract and retain talent.

The inland provinces are ‘low-hanging fruit’ for improving China’s growth rate. Beijing would do well to pick them.

Yang Yao is Professor and Dean at the National School of Development and Professor and Director at the China Centre for Economic Research, Peking University. Mengqi Wang is based at the National School of Development, Peking University.