The Cacophony of a Hundred Flowers

The need for a focused solution to China's growth problem

It is a major understatement to say that that China’s growth problem has received a good deal of recent attention.  The chart below, drawn from Google’s “Ngram" book viewer,”  measures the frequency at which the phrase “China’s weak economy” appears in scanned sources of Google Books between 1950 and 2022. Starting in 2015, this filter indicates that these concerns have received unprecedented attention over this 72-year interval. Significantly, the period covered by the search starts with the founding of the PRC and includes the Great Leap Forward and the Cultural Revolution, an 18-year span from 1958 to 1976 that left China’s economic and social fabric in tatters. Significantly, the figure does not include results for 2023 and the first half of 2024, when concerns have intensified over China’s economic growth dilemma.

With this attention has come a complex diagnosis of China’s increasingly daunting growth problem. The latest so-called Article 4 Report on China just issued by the International Monetary Fund is the most comprehensive and up-to-date compendium of the many strands of debate over what ails — and what might fix — the Chinese economy. It starts with the property sector and then runs through the usual litany of concerns, from fiscal consolidation and financial stability to excess reliance on industrial policies, eliminating trade and investment restrictions, and my long favorite catch-all of so-called structural problems.

With the Communist Party of China having just concluded its long-awaited Third Plenum, a once every five-year gathering aimed at establishing an overarching medium-term economic policy and reform framework, there is considerable overlap with the IMF Article 4 policy agenda.  There is no debate over the need for action.  The trick, as always, is prioritization and implementation.  As we learned from the experience of Japan’s many lost decades, there is much to be gained from simplifying the myriad array of  problems that ail any economy — picking out the most important impediments to economic growth and focusing policy strategy accordingly.

That is very much the case for China’s consumption problem. I admit to being a broken record on this topic.  My earliest effort to lay out the case for Chinese consumer-led rebalancing can be found in a paper I wrote in 2006 (“China’s Rebalancing Challenge” featured in Chapter 3 of my 2009 book, The Next Asia).  Nearly a year later, in March 2007, former Premier Wen Jiabao famously pondered the fate of a Chinese economy that, while strong on the surface,  he argued was “unstable, unbalanced, uncoordinated and unsustainable.”  I took that statement by the Chinese leadership as validation of my approach.  The implication was that the paradox of the “Four Uns,” as I dubbed it back then, could only be resolved by shifting the structure of the Chinese economy from export- and investment-led growth to one that drew increasingly on untapped consumer demand.

For China, such a transformation would be nothing short of extraordinary.  Initially, I stressed several key benefits: less reliance on excess supply and more support from deficient aggregate demand; a reduced current account surplus that would lower trade tensions and concomitant vulnerability to external shocks; a shift away from energy- and pollution-intensive manufacturing toward greener, labor-intensive services; and consolidating a fragmented fiscal policy in an effort to avoid regional disparities in income distribution and economic growth. Over time, I also focused on rebalancing as a key to conflict resolution with the United States.

From the start, my case for Chinese rebalancing was prescriptive. I stressed three key building blocks to a successful consumer-led rebalancing: job creation, real wage increases, and shifting the household saving propensity.  The first two factors — services-led job creation and rural-urban migration aimed at raising overall wages — would collectively boost labor income generation.  The third factor emphasized social safety net reforms — healthcare and retirement — as the means to address the fears of uncertain future and allow for a reduction of the excesses of precautionary saving.

All these years later, the verdict is clear:  China’s consumer-led rebalancing strategy has been stymied.  The household consumption share of Chinese GDP remains around 37%, basically the same as it was in 2006 when I first started writing about this issue.  Yes, reflecting solid growth in the services sector and an ongoing impetus from rural-to-urban migration, Chinese policy has been reasonably successful in boosting labor income.  But this progress has not been accompanied by a willingness to reduce excess household saving.  As the figure below indicates (also taken from the IMF’s recent Article 4 report on China), more than 60% of urban Chinese residents now want to increase personal saving, up dramatically from the 45% who expressed such an inclination five years ago. Meanwhile, largely on the heels of a downward spiral in the long-beleaguered property market, Chinese consumer confidence has all but collapsed in the past three years.

I stressed from the start that successful labor income generation is necessary but not sufficient to drive consumer-led rebalancing. Without converting newfound personal income into discretionary purchasing power, there can be no spark to consumer demand. Again, I have been like a broken record in stressing what needs to be done to address this disconnect in China’s rebalancing equation: It will require a robust and well-funded social safety net — healthcare, retirement, and benefit portability that would come with hukou reforms affecting nearly 300 million migrant Chinese workers.  The safety-net solution transforms fears of insecurity into the confidence of security — absolutely essential for an aging Chinese society to address its excess household saving problem.

Therein lies the essence of China’s rebalancing conundrum and, by inference its growth problem. I started out above by arguing that  China’s growth problem is now of a very  different order of magnitude than that encountered at any point since 1950. As I stressed in a paper prepared (but not delivered) at the 2024 China Development Forum, it’s not just the protracted downward pressure from both cyclical (i.e., the property crisis) and structural (i.e., demography and productivity) forces. It’s also the seemingly chronic impediments to consumer-led rebalancing.  For China, rebalancing and growth challenges go hand in hand.

As I also argued above, a successful policy strategy requires prioritization and focus. But this runs against the grain of the Chinese-style policy debate. Since the Mao Zedong era, China’s approach has been to let “a hundred flowers bloom,” allowing for the consideration of a multiplicity of views and reforms in the hope that the optimal solution will eventually percolate from the collective opinions. Xi Jinping stressed that same approach in the Third Plenum of late 2013 and in the just-completed Third Plenum of 2024, both of which included reference to over 300 individual reform measures.

While such a shotgun approach to strategy and reform may have worked well in the early days of the PRC, that may no longer be the case today. The risk is that the thrust of the policy message ends up getting buried in the long list of innumerable reforms in third plenum decision documents. Instead, China needs laser-like focus on the biggest missing piece of its rebalancing and growth puzzle — in this case, the imperatives of social safety net reform. To the extent that Beijing deflects attention from this key goal by emphasizing hundreds of other flowers in its policy agenda, rebalancing will continue to be stymied, the Chinese consumer will languish, and the growth conundrum will deepen. For Beijing, this the time to pick the most important flower.