Rebalancing the Chinese economy By Simon Tilford
★ The scale and pace of economic development in China is without precedent, and has lifted hundreds of millions of people out of poverty in just one generation. But China’s economy is not on a sustainable path economically or environmentally, and the country faces rising international tensions over its growth model. ★ The Chinese save too much and consume too little. The aim of economic growth is to boost living standards, and this requires China to consume more of what it produces. It is not in China’s economic or political interests to run a huge trade surplus and invest that surplus in lowyielding assets in developed countries. ★ China needs to expand social security and healthcare insurance, liberalise financial services and allow the renminbi to strengthen. Better social provision would make the Chinese feel more secure and reduce the need to save. A stronger currency would facilitate the shift to a more domestically-driven, service-based economy by boosting disposable incomes and encouraging investment in the domestic economy.
The transformation of the Chinese economy and society is astonishing. A country comprising almost a fifth of the world’s population is shifting at lightning speed from an agrarian-based economy to an urban, industrial one. China has successfully lifted hundreds of millions of people out of poverty in just one generation. This is a phenomenal achievement; it took other countries much longer to do this. There was nothing inevitable about China’s explosive economic development. Plenty of developing countries have failed to industrialise. China’s success reflects policies put in place by the Chinese authorities, in particular their decision to open up the economy to foreign investment, and their skilful management of the economy. But while acknowledging the success of China’s development strategy, it is clear that China’s economy is not on a sustainable growth path. The country needs to shift towards a more consumption-based, serviceorientated economy. This policy brief argues that the transition will not be easy, but that it is necessary in
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order to put the Chinese economy on a sound footing economically, politically and environmentally.
The structure of the Chinese economy A few statistics quickly illustrate how skewed China’s economic structure has become. Since 2004, China has devoted over 40 per cent of its GDP to investment. This is far higher even than in Japan, South Korea and Taiwan at the height of their investment-led economic development strategies. The reliance on investment in industry means that industrial output now accounts for almost half of Chinese GDP, and services for just 40 per cent. At least in terms of the relative importance of industry and services, China continues to look much more like a communist country than a capitalist one. Household consumption represented just 35 per cent of GDP in 2008, an exceptionally low share by any standards, while the household savings rate is running at over 20 per cent of income. (See charts one and two).
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