After more than three decades of rapid growth, the Chinese economy has slowed sustainably since the global financial crisis. While cyclical factors have played a role, a larger part of the growth deceleration reflects structural factors that hinder the sustainability of the economy. In particular, an aging population will soon reduce the availability of labour in China, and in turn, weigh on potential growth.

According to UN projections, the working age population (15-65 years old) in China will peak at 1.01 billion in 2015 before falling gradually to 900 million by 2040. While China's demographic situation is comparable to its Asian neighbours and the US, the aging process has started at much lower income levels, fuelling fears that China is growing older before it gets rich.

In addition, the Chinese economy has become increasingly reliant on investment to power growth. While rapid capital accumulation is not uncommon among fast-growing economies, the unproductiveness of China's recent investment glut has raised concerns about many negative side-effects, including industrial overcapacity, unproductive resource usage and environmental degradation. Overall, the old growth model that relies on exhausting factor inputs (i.e. labour and capital) is no longer sustainable, and China needs to rebalance its economy so that future growth is powered more by productivity gains.

China has experienced a few productivity cycles in the last 3½ decades. In each case, the upturn of the cycle was associated with economic reforms that 1) unleashed market power, 2) removed government controls, 3) improved price signals, and 4) increased economic integration internally and externally.

Taking cues from these reforms, the Chinese government announced a comprehensive reform plan at the 18th Plenum, aimed at hastening the pace of technical advancement and economic convergence. Among the proposed reforms, we believe the following will matter the most for China's economic rebalancing toward productivity increases:

· Urbanization, which helps to relocate labour from less productive sectors (e.g. agriculture) to more productive sectors, such as manufacturing and service, can boost productivity growth for the nation as a whole. In addition, urbanization can expedite an internal convergence within China, helping less-developed regions to catch-up to those of higher income and more productivity.

· Factor price and financial deregulation, which removes the administrative controls on the price of raw material, natural resources and money, (i.e. interest rates and exchange rates) can help to unleash price signals, remove distortions and subsidies, and improve the efficiency of resource allocation in the economy.

· SOE reforms are a critical part of the economic transformation from the visible hand of the state to the invisible hand of the market. China's own experience in the early 1990s suggests that removing government backstops and opening monopoly industries to greater market competition can significantly boost economic efficiency and potential growth.

So what does all this mean for China's future growth? We think given the deteriorating demographics and the need to change its investment model, growth contribution from labour and capital will decline in the coming years. The more challenging part is to determine how total factor productivity will grow, in light of the structural reforms intended to lift the efficiency of the economy.

In our baseline case, which represents broadly successful reforms, we expect productivity growth to accelerate towards 3%, from 1.8% currently. However, this is not large enough to offset the diminishing contribution from labour and capital, and so potential growth will decelerate to 6.5% by 2020.

Looking beyond the current decade, our baseline case allows for growth to slow dynamically as the economy matures. While successful reforms can help China to sustain reasonable productivity gains, ageing population and slower capital formation will force the economy to slow towards 5% by 2030. In our adverse scenario, where China fails to rebalance its economy, the catch-up process essentially stalls beyond the current decade, with growth falling abruptly to 2% by 2030. This can be seen as a scenario whereby China fails to make the economic leap and falls into the mid-income trap.

Aidan Yao is a senior emerging Asia economist at AXA Investment Managers Asia