CONSUMPTION BOOST: Shanghai residents browse housewares at a local supermarket. Economists say China needs stronger consumer spending to sustain growth (PEI XIN)

In late February, the National Bureau of Statistics (NBS) published its annual statistical bulletin, showing that China's gross domestic product (GDP) registered an increase of 7.8 percent in 2012, reaching 51.93 trillion yuan ($8.33 trillion).

With the Chinese population expanding to 1.3 billion, NBS figures show that the country's per-capita GDP reached $6,100 last year, leaving China within the rank of middle-income countries by World Bank standards.

According to 2008 World Bank standards, countries should have a per-capita GDP above $11,906 to be part of a high-income group of countries, while $3,856 is the minimum level for middle-income countries. In 2011, the World Bank raised the standards to $12,475 and $4,036 respectively.

NBS figures showed that China became a middle-income country in 2010, when its per-capita GDP reached roughly $4,300, triggering debate over whether the country is heading into the "middle-income trap."

As labor and other costs continue to rise, some fear that China will slip into a dilemma between losing its competitive edge over lower-cost countries elsewhere and falling behind advanced economies in higher-value products, and fall into the same trap as those middle-income economies experienced in the past.

If China wants to avoid the trap, it needs to undertake a slew of reforms, such as investing in technology, promoting innovation in the private sector, speeding up urbanization and reducing income inequality so that ordinary people benefit more from economic growth, the Asian Development Bank (ADB) said in a report published last October.

"Tilting the balance of the economy from low-cost to high-value production, from relying on government to relying on markets, from investment to consumption, and from external to domestic demand will allow China to grow beyond its current middle-income status," said Zhuang Juzhong, the report's co-author and ADB deputy chief economist.

"Implementing this strategy would greatly increase the likelihood of sustained growth and reaching high-income status before 2030," the ADB said in the report. "Scenario analysis shows China has the potential to grow 8 percent annually from 2010 to 2020 and 6 percent from 2020 to 2030, if it addresses its challenges effectively."

Advancing reforms

In the more than 30 years since the reform and opening-up policies were introduced, China has witnessed rapid development. According to ADB statistics, the Chinese economy achieved an average annual growth rate of 9.9 percent from 1980 to 2011.

However, behind that rapid development were low-cost labor and low-quality exports. For today's China, the development model has reached its limits, according to Robert Wihtol, Director General for ADB's East Asia Department.

He said that China is losing its advantage to compete with low-income countries due to sharp rising wages and other production costs on the one hand; on the other, it cannot compete with developed economies either because of its relatively low level of technology and innovation.

"China is not a cheap place any longer," said Zhang Yansheng, Director of the Institute for International Economic Research under the National Development and Reform Commission (NDRC). "The country is quickly losing its traditional advantages, while its new advantages have yet to take their place."

Zhang warned that the country's labor-intensive, export-reliant and investment-driven economy is unsustainable, and China must upgrade its industrial structure and strengthen its innovation capabilities.

"Without changing the development model, China will find it difficult to sustain its growth and avoid the middle-income trap," Zhang said.

According to Zhang Chewei, Deputy Director of the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences, as labor costs rise and the aging population continues to grow, China's demographic dividend, the window of opportunity for a country's economic growth, will completely disappear by 2025.