China's Rebalancing Imperatives
Invited paper for China Development Forum 2024
China’s Rebalancing Imperatives:
Past, Present, and Future
EXECUTIVE SUMMARY
The Issue
China is at a critical juncture. The economy is underperforming, facing a tough combination of cyclical headwinds and serious structural challenges. Thus far, the Chinese policy response has drawn on a time-honored playbook from the past, which has been very successful in addressing cyclical problems. That is not enough today.
Analysis
Rebalancing, a theme I have addressed many times in past China Development Forums, is the only way out. A failure to rebalance risks a protracted Japanese-like stagnation. The interplay of three key forces drives China’s rebalancing imperatives:
· Shifting global pressures: While many believe the global economy is on the cusp of the fabled soft landing, a 3.1% growth trajectory projected through 2028 by the IMF speaks of a world that is dangerously close to its “stall speed” — thereby putting the global economy only a shock away from a recessionary relapse. While China remains the world’s major economic engine, its growth contribution is now declining, underscoring downside risks to baseline global growth projections.
· Lagging household consumption: In the face of lingering global headwinds, support from domestic demand is essential for China to hit its growth objectives. With the ongoing property crisis and excess leverage closing off traditional stimulus options, pressures fall on aging Chinese consumers to fill the void. Social safety net reforms — retirement and healthcare — are essential to reduce fear-driven precautionary saving and spark a gradual, sustainable rebalancing toward consumer-led growth.
· Productivity leverage: In the face of potential global headwinds and lagging consumer-led support to domestic demand, productivity must be a key source of leverage for China to counter lingering structural pressures and to achieve its medium- to longer-term growth objectives. This is consistent with President Xi Jinping’s recent emphasis on total factor productivity as the core indicator of success.
Policy Conclusions
China’s playbook of proactive fiscal stimulus and prudent monetary policy is necessary, but not sufficient to address the economy’s serious structural rebalancing challenges. Social safety net reforms, coupled with efforts to unshackle the regulatory constraints on animal spirits and sentiment are vital if the nation is to recapture the courage and vision of past reforms.
NOTE: This paper was prepared for the Engagement Initiative of the 25th China Development Forum, March 24-25, 2024, in Beijing. Full paper is avilable on request via email to: stephen.roach@yale.edu