By Chan Ka Sing
HONG KONG- Chinese policymakers have been talking about rebalancing the economy from investment and exports towards consumption for more than two decades.
Yet as President Xi Jinping’s austerity campaign and a crackdown on consumer finance have shown, a collectivist approach to economic planning is hard to square with free-spirited spending.
Recent stimulus policies suggest that Beijing is not that keen on ditching the old model.
Consumption accounts for roughly 75 percent of GDP globally with the remaining 25 percent coming from investment, according to the World Bank. Yet in the People’s Republic, consumption was responsible for just 53 percent of economic output in 2022 while investment took a 43 percent share.
Authorities in Beijing realize that a growth model which relies heavily on fixed-asset investment and exports may not be sustainable. The $18 trillion economy’s ailing growth and deflation invites comparisons with the prolonged period of economic stagnation in Japan that started in the 1990s.
To avoid this outcome, most economists agree that China will have to address the imbalance, probably by spending trillions of yuan to boost consumption and reinvigorate growth.
By this yardstick, Beijing’s stimulus measures announced last month were a disappointment. Apart from pledging bigger support for low-income individuals and students to boost consumption, most of the efforts were aimed at reviving investment by ailing local governments.
Though authorities may yet unveil more dramatic policies, the reality to date falls far short of the rhetoric. As early as 2007, then-Premier Wen Jiabao had warned that a growth model heavily reliant on investment is “unbalanced, unstable and unsustainable”, and that an economic rebalancing towards consumption would be a top priority. In 2022, the ruling Communist Party published an all-encompassing directive calling for efforts to establish a “sound domestic demand system” by 2035.
Such a shift seems essential for China to hit its economic goals. Xi’s ambition is for the People’s Republic to double its GDP between 2020 and 2035. To achieve such a grandiose feat, the world’s second-largest economy will have to expand by close to 5 percent in each of the next 10 years. Yet if the balance of investment and consumption remains the same as today, economists at Carnegie China estimate that in such a scenario China’s share of global investment would rise by 5 percentage points to an astonishing 38 percent. Depending on the rest of the world to absorb such an increase in production by China would inevitably ratchet up trade tensions.
Japan’s experience offers a fresh perspective on China’s growth problem. Low consumption and high savings generated by workers enabled the country to rise quickly from the ruins of World War Two. But in the 1980s the Japanese economy began to suffer from many of the same challenges that China is grappling with today. The government responded by cajoling savers to spend more.
A strong currency reinforced the shift by disadvantaging exports and encouraging consumption. This was part of the thinking behind Japan’s decision to sign the 1985 Plaza Accord, which revalued the yen against the US dollar. A year later, Tokyo published the Maekawa Commission report that called for rebalancing the economy towards consumption. Even then, according to the World Bank, it still took Japan 17 years to raise the consumption share of GDP by 10 percentage points to a level close to the global average. Japan’s “lost decades” following the collapse of a massive asset price bubble did not help the shift. But the drawn-out transition also shows the challenges of making big economic adjustments quickly and smoothly. – Reuters
