1/9
Good article by @ZongyuanZoeLiu and @BennSteil on why it is so difficult for Beijing to boost domestic consumption in China. It requires effectively reversing the growth model that was put into place over the past 3-4 decades.
foreignaffairs.com via @ForeignAffairs
Good article by @ZongyuanZoeLiu and @BennSteil on why it is so difficult for Beijing to boost domestic consumption in China. It requires effectively reversing the growth model that was put into place over the past 3-4 decades.
foreignaffairs.com via @ForeignAffairs
2/9
This not only implies significant changes in political institutions, but it also means reversing the enormous direct and indirect flow of subsidies that has made Chinese manufacturing so competitive. As with all export-dependent economies, this makes adjustment very painful.
This not only implies significant changes in political institutions, but it also means reversing the enormous direct and indirect flow of subsidies that has made Chinese manufacturing so competitive. As with all export-dependent economies, this makes adjustment very painful.
3/9
But I do have one disagreement with the article. The authors argue that Beijing will never allow consumption-led growth in China. I would argue instead that China doesn't have a choice.
But I do have one disagreement with the article. The authors argue that Beijing will never allow consumption-led growth in China. I would argue instead that China doesn't have a choice.
4/9
Chinese investment, currently at 42-44% of GDP, is simply unsustainable. With so much of it going into non-productive investments, the result had to be (and is) an unsustainable increase in debt, which is finally emerging this year as a serious constraint for China.
Chinese investment, currently at 42-44% of GDP, is simply unsustainable. With so much of it going into non-productive investments, the result had to be (and is) an unsustainable increase in debt, which is finally emerging this year as a serious constraint for China.
5/9
There is no way, in other words, that investment can retain anywhere near that share of GDP – if it dropped by 10 percentage points China would still be among the highest investing countries in the world.
There is no way, in other words, that investment can retain anywhere near that share of GDP – if it dropped by 10 percentage points China would still be among the highest investing countries in the world.
6/9
But as the share of investment declines, by definition the share of consumption must rise, as China is far too big for net exports to take up the slack. That means that one way or another consumption in China will grow faster than GDP.
But as the share of investment declines, by definition the share of consumption must rise, as China is far too big for net exports to take up the slack. That means that one way or another consumption in China will grow faster than GDP.
7/9
But there are two ways that can happen. A surge in consumption growth, perhaps to 7%, can drive GDP growth of 4%. Or a sharp drop in GDP growth, say to 1-2%, can be consistent with consumption growth of 3-4%.
carnegieendowment.org
But there are two ways that can happen. A surge in consumption growth, perhaps to 7%, can drive GDP growth of 4%. Or a sharp drop in GDP growth, say to 1-2%, can be consistent with consumption growth of 3-4%.
carnegieendowment.org
8/9
In either case consumption must (and will) lead GDP growth, but there are better ways in which that can happen and worse ways. As I see it, Liu and Steil rule out the better ways, but that just means that China must follow the worse ways.
In either case consumption must (and will) lead GDP growth, but there are better ways in which that can happen and worse ways. As I see it, Liu and Steil rule out the better ways, but that just means that China must follow the worse ways.
9/9
It is important to understand that rebalancing is not a choice. It is the inevitable adjustment for highly unbalanced economies, and the longer it is postponed, the more difficult it tends to be. But there are many ways rebalancing can happen.
It is important to understand that rebalancing is not a choice. It is the inevitable adjustment for highly unbalanced economies, and the longer it is postponed, the more difficult it tends to be. But there are many ways rebalancing can happen.
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