Edinburgh-based global fund manager Standard Life Investments (SLI), which manages assets of about £270 billion, has warned that growth in China could fall as low as 2% unless Chinese authorities quickly rebalance and restructure the economy.

SLI said it analysed the challenges facing China as it attempts to make a tricky transition from middle to high-income status.

“By our estimates, the economy’s growth rate has slowed to 5% p.a. as its model of credit-fuelled, state investment-led growth has become exhausted and increasingly counter-productive,” said Alex Wolf, SLI emerging markets economist.

“In a best-case scenario where structural reforms are accelerated, the economy could maintain growth in the range of 4-5% per annum over the next decade.

“If the authorities fail to deliver on reforms then China risks falling into the middle income trap, with potential growth slowing to as low as 2%.”

Wolf said that although the Chinese authorities recognised the need to rebalance and restructure the economy, they were facing a range of difficult trade-offs including:

• Controlled deleveraging is necessary to promote more sustainable growth in the future — but that requires accepting lower growth today
• Financial sector reforms are necessary to underpin consumption-led growth and better resource allocation — but will entail a loss of direct control over credit growth, resource allocation, and the exchange rate for policymakers
• Reform of state-owned enterprises (SOEs) and further deregulation of product markets are needed to lift innovation and increase productivity growth — but require the state to play a regulatory rather than competing role within the economy