Source: Eurasia Group

For decades, China’s blistering growth has depended on exports and investment. The country has become the world’s workshop and lifted millions out of dire poverty. And for the first time in nearly two centuries, China has returned to a position of global power and influence. But this growth model is no longer sustainable and China’s savvy leaders know it. They are committed to rebalancing the country’s economy because their capital-intensive, export-oriented approach is delivering diminishing returns and threatens to become a major political vulnerability for the government.
Why is China’s growth model delivering diminishing returns? The global economic crisis provided clear evidence that China’s export-driven economy is vulnerable to dips in demand in the rest of the world. Meanwhile, its dependence on investment has introduced distortions and imbalances into the Chinese economy.  China’s rebalancing agenda is not merely about economics but, ultimately, the political viability of the Chinese system. Beijing has delivered economic prosperity to many Chinese citizens. But those very successes have yielded numerous problems—some large—that could undermine the regime’s legitimacy if left wholly unattended.

In this comprehensive look at the future of China’s political economy, Eurasia Group’s China team examines the maladies that confront Chinese leaders and the solutions they have prescribed to remedy them. Their blueprint is the 12th Five Year Plan, a set of strategic goals and binding economic targets through which they aim to alter China’s macroeconomic landscape in far-reaching ways, with effects that are likely to be felt for a decade to come.

But the report argues that China’s economic landscape will not change as fundamentally as the 12th FYP’s designers (and many foreigners) hope. And that, in turn, means that China in five years will be more brittle and beset by social difficulties. Although China should have little trouble muddling through until then, Chinese leaders will likely face starker choices when the plan has run its course in 2015 than they do today. They can double down on rebalancing—creating a more sustainable (long-term) growth model, but exacerbating (short-term) economic pain. Or, they can continue their attempt to muddle through and risk heightened political instability as a result of the widening gap between haves and have-nots. Eurasia Group is not optimistic that China’s cautious leaders have the stomach for bold reform. Thus, the next decade is likely to be more fraught than conventional wisdom suspects.  This comprehensive new report explains why.

Full text available at Eurasia Group.