As worries about economic overheating in China escalate, Chinese policy makers are focusing on domestic rebalancing. China’s new five year plan—recently debated by the National People’s Congress—prioritizes increasing domestic consumption and promotes urbanization, demonstrating Beijing’s commitment to rebalancing.
Steven Barnett, division chief of the Asia and Pacific department at the IMF and Carnegie’s Pieter Bottelier and Michael Pettis assessed the need for rebalancing, its progress, and what can be expected in the future. Carnegie’s Douglas Paal moderated.
With much of the world still struggling to recover from the Great Recession, China’s low-consumption, high-investment, export-oriented economy will likely be unsustainable, participants agreed, making rebalancing toward domestic demand necessary.
Rebalancing will require household consumption to rise as a share of GDP—meaning that savings and investment as a share of GDP will fall—and the narrowing of current account surpluses. Numerous policy changes will be needed to support rebalancing, and the transition may be bumpy.
Bottelier argued that some rebalancing is already occurring and will continue in the coming years.
However, rebalancing in China is unlikely to be easy. Pettis argued that increasing consumption growth will be difficult, since consumption has already been expanding very rapidly. The only way to viably increase consumption is to transfer wealth from the public sector to households, which many of the current reforms fail to do. Bottelier noted that the privatization of urban housing around the turn of the century was an example of such a transfer (on an enormous scale), but more should be done.
Participants also highlighted the potential problems caused by debt. Rapid investment has led to a rise in debt, and though official and household debt levels are still low, Pettis noted that the China Banking Regulatory Commission has said local government financing vehicles are barely solvent. Financing these debts requires low interest rates, but low rates depress household income and therefore consumption.
Participants offered several policy recommendations to help ease the transition in China.
Panelists also addressed questions about how Chinese rebalancing would affect the United States and the rest of the world.
Barnett concluded that, like all major economies, China has a part to play in global rebalancing. Though challenging, this rebalancing is not only in the best interest of China, but also of the world economy.
The Carnegie Asia Program in Beijing and Washington provides clear and precise analysis to policy makers on the complex economic, security, and political developments in the Asia-Pacific region.
The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.
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