Can China sustain its high-income status?

China’s long ascent from poverty to prosperity may finally meet the World Bank’s statistical definition of success. With its gross national income (GNI) per capita projected to exceed the 2025 high-income threshold—estimated at around USD $13,845—Beijing is poised to join the league of developed economies. Yet the triumph risks being misread. Achieving high-income status is a moment of arrival; sustaining it requires transformation.

This inflection point demands a more sober appraisal of China’s growth foundations. The real challenge isn’t reaching the line—it’s staying above it without artificial props or cyclical windfalls. Beneath the celebratory headline lies a set of unresolved capital inefficiencies, demographic reversals, and institutional gaps. In macroeconomic terms, the upgrade may be more statistical than structural, more optical than foundational.

China’s crossing into high-income territory will likely be a function of nominal gains supported by favorable RMB exchange rate calibration, continued urban income expansion, and the residual effects of past infrastructure cycles. However, few of these drivers reflect sustainable productivity growth. The underlying growth composition is distorted by property market overhangs, state-driven capex, and uneven income distribution.

The RMB’s relative strength against a broad basket of currencies in recent years has inflated nominal income metrics. But this does not signal real convergence in total factor productivity (TFP), innovation ecosystems, or institutional maturity. In fact, youth unemployment remains above 14% in surveyed urban cohorts, and the informal sector has expanded in parallel with platform work substitution, masking labor underutilization.

This suggests that China is approaching high-income classification from the top-down—via urban elites and statistical optics—rather than bottom-up, through resilient middle-class formation and mobility. The risk is that GNI per capita will flatten or reverse as demographic pressures intensify and urban wage growth plateaus in the absence of deep services liberalization.

At the provincial and prefecture level, public investment remains skewed toward politically insulated infrastructure projects with declining marginal returns. Local government financing vehicles (LGFVs) continue to anchor their fiscal logic around land concession sales and non-transparent off-balance-sheet debt. Beijing’s attempts at deleveraging have not yielded meaningful capital reallocation toward high-productivity, export-diversified sectors.

The private sector—particularly SMEs in technology and advanced manufacturing—still faces capital access constraints and policy ambivalence. While slogans endorse private entrepreneurship, credit is disproportionately routed to state-linked entities, which enjoy implicit guarantees and regulatory leniency. This results in structural crowding out and undermines innovation-driven growth strategies.

The capital stock is thus expanding, but not in a way that supports factor reallocation or labor productivity enhancements. That is why institutional allocators continue to downgrade China’s capital formation quality, even as aggregate investment ratios remain elevated.

No high-income country in modern economic history has sustained upward income mobility while facing the magnitude of demographic contraction that China now confronts. In 2023, the country recorded a population decline for the second consecutive year. The working-age population is shrinking, old-age dependency is rising, and internal migration flows are weakening—especially from rural to second-tier cities.

Pension system imbalances and healthcare expenditure burdens are already visible in sub-provincial balance sheets. The fiscal strain on local governments is being exacerbated by mandatory social support obligations that were designed for a much younger demographic profile. Without parametric pension reforms, China risks an intergenerational squeeze where younger workers face higher taxes with declining real benefits—constraining consumption and eroding productivity.

Moreover, the state’s historical reliance on the household savings glut to finance state development is no longer sustainable. As the dependency ratio climbs and housing wealth becomes illiquid, precautionary savings may rise again—suppressing consumption even further. This dynamic undermines rebalancing efforts and reinforces stagnation risks.

China's macro toolkit—once praised for its precision and coordination—is now constrained by credibility asymmetries and external pressure. On the monetary side, the People’s Bank of China (PBOC) faces a tightening corridor. Interest rate cuts are constrained by capital outflow risk and exchange rate defensiveness. Unlike in the past, liquidity easing no longer triggers strong private credit response. Instead, funds are recycled into low-risk instruments or hoarded by risk-averse banks.

Fiscal stimulus, once an effective lever for countercyclical stabilization, has lost potency. LGFVs have already over-extended their borrowing capacity, and recent attempts at centralizing local debt resolution have triggered investor scrutiny without resolving the underlying revenue volatility. While the central government has room to deploy balance sheet support, doing so at scale risks moral hazard without guarantees of allocative efficiency.

Meanwhile, capital account liberalization remains incomplete. This semi-closure creates a dilemma: China cannot simultaneously anchor foreign investor trust, manage the RMB, and sustain inward investment momentum without clearer rule-of-law protections. As a result, global funds are recalibrating their exposure—not just because of returns, but because of institutional clarity.

China’s declining share of global FDI inflows is not cyclical—it reflects a structural recalibration. ASEAN, South Asia, and Central Europe are increasingly capturing supply chain diversification flows, supported by better demographic profiles and improving logistics capacity. India, Vietnam, and Indonesia have each benefited from Western firm “China+1” strategies, often with stronger legal frameworks or policy stability for foreign investment.

Sovereign funds—particularly those in the Gulf and Singapore—have notably diversified their emerging market exposure, moving away from concentrated China allocations into regional platforms, thematic plays (e.g., energy transition), and infrastructure assets that offer political risk hedging. The China risk premium is no longer just about geopolitics—it is about enforceability, governance, and alignment with institutional mandates.

Retail outflows are harder to measure but equally telling. Outbound property investment, overseas education spending, and insurance-linked dollar assets remain vehicles for household capital flight—albeit via indirect, often policy-tolerated channels. The middle class is not betting on long-term RMB-denominated returns. It is quietly hedging.

High-income status implies more than nominal metrics. It assumes institutional convergence with advanced economies in terms of transparency, legal frameworks, and capital market infrastructure. China’s progress on these fronts remains uneven.

The legal environment for contract enforcement, intellectual property rights, and investor recourse lacks predictability. Regulatory crackdowns—particularly in tech, education, and platform sectors—have created deep uncertainty about the boundary between policy experimentation and commercial autonomy. For global allocators, this ambiguity translates into “China risk” that is increasingly priced into equity multiples and private capital premiums.

Attempts to internationalize the RMB remain limited by capital controls and offshore liquidity thinness. Swap lines and bilateral trade settlements help, but they are not substitutes for global reserve currency credibility. The SDR inclusion was symbolic. The question now is whether China’s financial system can evolve into a rules-based, market-driven environment. Current signals suggest only partial movement.

Crossing into high-income territory is a milestone—but it is not destiny. The global economy is reordering around supply chain resilience, institutional trust, and demographic tailwinds. China’s policy trajectory remains cautious, reactive, and risk-averse. It is managing volatility, not redesigning structure.

To stay high-income, China must:

• Shift capital away from real estate and toward productivity-enhancing sectors.
• Rebuild regulatory trust with institutional investors through transparency and rule-of-law consistency.
• Undertake pension and labor market reforms to anchor consumption and ease fiscal drag.
• Accept slower but more sustainable growth, anchored in services liberalization and income redistribution.

Absent these moves, China risks stagnating in a high-income trap: nominally above the threshold, but structurally misaligned to the norms that define developed economies. This is not a collapse scenario—it is a middle-income mindset housed in a high-income shell.

From a sovereign fund lens, 2025 is not the year to re-up China risk exposure based on GNI headlines. It is the year to deepen scenario modeling, reassess institutional alignment, and scrutinize subnational fiscal resilience. The long-term bet on China is not invalid—but it is no longer a momentum trade. It is a structural recalibration play.

What appears to be a celebratory arrival may, in retrospect, be the beginning of a plateau.
And in capital markets, plateaus aren’t stable—they attract gravity.