The Unbalancing of Chinese Rebalancing

After nearly 20 years of promises, Chinese rebalancing has failed.

Chinese rebalancing has been an abject failure. Nearly twenty years after former Premier Wen Jiabao bemoaned the unbalanced fate the Chinese economy, the problem has gone from bad to worse. For a growth-dependent Chinese economy, failed consumer-led rebalancing spells increased reliance on other time-worn sources of economic activity, especially exports and investment. This raises critical strategic questions for China and the rest of the world.

As the first western economist to stress China’s perspective on the need for such rebalancing, I am especially disappointed to write these words. I remember very well sitting in a meeting room in Beijing on March 17, 2007, watching a press conference by then Premier Wen Jiabao following the conclusion of the National People’s Congress. There was a small group of us in attendance, including some senior Chinese officials, when Wen uttered his now famous critique of the structure of the Chinese economy. While strong on the surface, he argued, there was good reason to be more concerned about problems beneath the surface that were causing the Chinese economy to become increasingly “unstable, unbalanced, uncoordinated, and unsustainable.”

There was an audible gasp from the Chinese officials in the room, who translated the premier’s remarks to me and underscored their significance in sparking what quickly became an important internal debate in China. I went back to my hotel room and wrote my first piece on the rebalancing imperatives of the Chinese economy that became the basis for my testimony before the Senate Finance Committee nearly two weeks later on March 28, 2007. I stressed the growing urgency of likely shifts from investment- and export-led growth to more of a consumer-led impetus and what that implied for other dimensions of Chinese rebalancing — from manufacturing to services, from excess saving to saving absorption that would lower the current account surplus and fund a larger social safety net. I took the “four uns” of Wen Jiabao, as I later dubbed them, as an important signal from the Chinese leadership that it was prepared to face structural rebalancing imperatives head-on. I was convinced it was only a matter of when, not if.

And now, as the traders used to say to me ever so delicately in my Wall Street days, “It’s time to wake up and smell the coffee.” China’s retail sales fell 0.6% year-on-year in May 2026, an unexpected drop following an anemic 0.2% increase in April and the first monthly decline in 3½ years. Moreover, and to the broader point stressed by Wen Jiabao nearly twenty years ago, this latest decline in retail sales comes in the context of a Chinese household consumption share that stood at just 39.9% of nominal GDP in 2024. That is virtually identical to the 39.8% ratio for 2005 that Wen had in hand when he made his now famous “four uns” remarks in March 2007. It is important to stress the long lags in the consumption share data noted above; given the protracted weakness in Chinese consumption in 2025 and early 2026, there is good reason to believe that the current ratio of household consumption to GDP has fallen below the Wen 2005 benchmark.

Explanations of this outcome are endless. Among the more widespread hypotheses: a protracted property crisis, a low household income share of GDP, post-Covid scarring effects, demographic shifts, and high youth unemployment. My favorite explanation has long been an inadequate social safety net that boosts the fear-driven excesses of precautionary saving that, in turn, inhibits the rise in discretionary consumption. I would be the first to concede that all the above factors could well be at work. But in diagnosing a structural problem, it is especially important to look at longer-term structural impediments to consumption; in my view, fear-driven saving still looms most prominent in that perspective.

Whatever the explanation, these developments have not gone unnoticed by the senior leadership of the Chinese government. Xi Jinping now places emphasis on the strategic importance of boosting domestic demand and Premier Li Qiang’s March 2026 “work report” underscored the high priority of this focus. Unfortunately, these views have become an all-too familiar part of the Chinese policy refrain over the past two decades and, as a result, have lost their credibility. Yes, I am encouraged that China’s State Council is now allowing portability to some social insurance benefits for some 300 million migrant workers, a step in the right direction for so-called hukou reforms. But far more is needed to temper worker and household insecurity. In the end, results are far more important than over-promising on reforms. Unfortunately, the results are consistent with the very definition of abject failure stressed in the opening sentence above.

Some dismiss China’s failed consumer-led rebalancing as a statistical mirage, especially since it purportedly excludes government support for “social transfer in kind” like education, healthcare, cultural amenities, and subsidized food. While there may be some technical validity to this claim, it does not alter the basic structural conclusion stressed above: the household consumption share of nominal Chinese GDP — whether adjusted or unadjusted — is no higher today than it was in 2005 when Premier Wen first drew attention to this issue.

Two broad implications of China’s failed consumer-led rebalancing concern me the most: First, the Chinese people remain on the outside looking in. The State, State-owned enterprises, and private companies continue to reap a disproportionate share of the fruits of Chinese prosperity. This raises a profound question about the aspirational value proposition of the rising middle class in the People’s Republic of China.

Second, subpar consumption implies that Chinese growth requirements will once again be satisfied through increased export and investment shares of its economy. Yes, China has lowered its overall GDP growth target to 4.5% to 5.0% for 2026, about half the 9.3% growth trajectory from 1980 to 2020. But with the current size of the Chinese economy more than eight times the size (in purchasing power parity) than it was in 1980, exports, in particular, are having a far greater impact on global GDP. That spells an ever-increasing share of Chinese manufacturing in the world economy — from a current share of around 30% of global manufacturing to a ratio that some estimates put at an astonishing 45% by 2030. How receptive is the rest of the world likely to be to such an outcome? Anti-China protectionism seems more than likely under such a scenario, especially in Europe.

Wen Jiabao is China’s forgotten premier. But the strategic paradox he raised in 2007 — growth without rebalancing — is alive and well as China’s greatest macroeconomic challenge. I have warned about this for years. And now, amid all the talk of Chinese ascendancy in a post-conflict world, that could well be China’s most serious risk. Beijing is paying only lip service to its rebalancing imperatives.