China has been a strong performer among emerging economies, even if its growth has been slowing. But that’s set to end, according to research firm Capital Economics.

Growth in China could plummet to 2 percent over the next decade — from the expected 6.0 to 6.5 percent target this year, predicted Capital’s Chief Asia Economist Mark Williams.

“China’s time as an emerging markets outperformer is ending,” said Williams, at the Capital Economics annual conference in Singapore on Tuesday. He added that the estimated 2 percent growth is a “long way” from the 5 to 6 percent expected by the International Monetary Fund for the next decade.

Speakers at the conference pointed to a number of risks, as well as changing demographics in the world’s second largest economy. That includes its debt problem, declining work force, and increasingly weaker drivers of productivity, they said.

Those predictions come as Chinese Premier Li Keqiang said at the annual National People’s Congress on Tuesday that the official economic growth target this year will be 6.0 to 6.5 percent, slowing from last year.

Li also warned that there will be greater risks ahead for the Asian economy, saying: “We must be fully prepared for a tough struggle.”

Risks ahead

China’s debt problem will not go away, with the real concern being corporate debt and household debt — as opposed to government, said Julian Evans-Pritchard, Capital Economics’ senior China economist, at the conference. He blamed rising debt levels on poor lending practices.

“Policymakers have been trying to shift lending away from state firms towards their more efficient private counterparts. But so far, the results have been underwhelming,” Evans-Pritchard said.

Data also showed that state firms’ capital spending is higher now compared to a few years ago, he added. “Servicing the existing stock of debt will be more difficult as China’s economy continues to slow.”

Evans-Pritchard noted that the real risk lies with property developers, who have borrowed the most to fund their land-buying spree.

Some analysts have said that Beijing might stimulate its slowing economy this year through more loans, but Williams warned that the “key headwind” on the Chinese economy so far has been the tightening on shadow lending.

Shadow banking refers to activities performed by financial firms outside the formal banking sector, and therefore subject to lower levels of regulatory oversight and higher risks. State-owned banks usually prefer lending to companies owned by the government, and as a result, private companies have turned to shadow banking.

Productivity and work force

Apart from the debt issue, Williams said the underlying engines of rapid growth in the country’s economy are also fading. He cited a declining work force — hit by its One Child Policy introduced in the 1970s — and weakening drivers of productivity.

In a January report, Capital Economics projected that a shrinking labor force may result in a decline of about 0.5 percent in GDP growth by 2030.

The research firm pointed to China’s working population which is currently falling by about 0.2 percent per year. There were only 15 million babies born in China in 2018 — a 12 percent drop from the year before, and nearly a third below official forecasts made three years ago. In 2015, China started allowing couples to have two children.

But “the main drag on China will be coming from much weaker productivity growth,” Williams added.

While many emerging markets rely on exports to drive productivity, China’s share of the export market is already very large, and will need to rely more on domestic growth to drive productivity, he said.

“The only way to raise productivity, if you can’t do it by investing and building more, is to raise the productivity in workers … It means you want your companies to move closer to the technological frontier,” Williams concluded.