China towards a model of increased
domestic consumption
There
seems to be a growing consensus that China’s growth model heavily reliant on
exports and investment may have run its course. Not many challenge that China
will have to adjust to slower global trade growth over the next decade.
However, views differ on the role of investment.
By Gateway to China Staff
In recent years China's top leaders have repeatedly
described the country's current economic model as "uncoordinated,
unstable, unbalanced and unsustainable" This language is in stark contrast
to what has been a decade of apparent success: economical growth at high speed
and fast Chinese rise in the ranks of middle-income countries. What explains this
inconsistency between rhetoric and financial records? The Chinese authorities
have correctly assessed that the country's economy and its rapid growth in the
last decade have been based on high levels of investment and private
consumption systematic repression. This has resulted in a model of
capital-intensive growth that has not generated adequate increases in domestic
consumption and employment. Instead, it has built significant distortions in
the economy.
Rebalancing an economy as large as China is a long and
complicated task. Fortunately, economic policy prescriptions are relatively
clear. The imbalances in the Chinese economy distortions were created by three
of the most fundamental economic prices: interest rate, exchange rate and
energy prices. An undeveloped social safety net and high levels of income
inequality have exacerbated imbalances. These rebalancing policies must focus
on enabling these key prices to be more determined by the market. The
government should increase social transfers and guide the economy toward a more
equitable distribution of income. Most of these economic policy proposals are
nothing new. The nature and evolution of the Chinese economy, however, have
changed the relative importance of these various reform policies. Specifically,
the decline in the current account surplus of China, and therefore lower rates
for intervention in the exchange market, have reduced the importance of the
reform of the exchange rate on the reform of the interest rate. In addition,
new data on the high levels of income inequality in China have led to weigh
explicitly the relationship between income inequality and economic rebalancing.
The savings-investment equation indicates that the
difference between national saving and domestic investment equals the current
account surplus. More simply put, the production that is not consumed or
invested in the country is sent abroad. China's policies that repress
consumption include negative real interest rates on bank deposits for families,
an undervalued exchange rate, a thin social safety net and restrictions on the
ability of workers to organize and demand higher wages. This level of suppressed
consumption combined with subsidies to a super-production generates a large
trade surplus.
While external rebalancing has taken place in recent
years is real, it has not been produced in an ideal way. To balance the
savings-investment equation, in recent years, the investment rate in China has
skyrocketed, so that the current account surplus has shrunk.
Data source : Peterson
Institute for International Economics
This only aggravates the problem of over-investment in
China. A much more convenient way to reduce external imbalances would have been
to lower the excessively high Chinese savings rate, pouring resources into the
domestic market consumption. This would bring great benefits to the global
economy, as China's actual demand, thus generated, would help developed
economies find their path out of recession or slow growth, by means of exports of
goods and services with high added value. In addition, the global economy would
be more harmonious and balanced.
