Should-Read: Martin Wolf: The Chinese economy is rebalancing, at last: “Consumption is at last becoming the most important driver of demand in the Chinese economy…

…This is a long-awaited and desirable adjustment…. But it still has a long way to go…. In 2007, premier Wen Jiabao argued rightly that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. In that year, gross national savings were 50 per cent of gross domestic product, up from 37 per cent in 2000. These huge savings financed domestic investment of 41 per cent of GDP and a current account surplus of 9 per cent. Then came the global financial crisis. The Chinese authorities promptly realised that the current account surplus had become unsustainable. In the short run, the only way to avoid a slump was to expand investment further. In 2011, gross investment reached 48 per cent of GDP and the current account surplus fell to 2 per cent. But national savings remained at 50 per cent of GDP.

This solution brought new problems. The first was a declining return on investment…. The second problem is that the increased investment was driven by a huge rise in debt…. Up to 2014… nothing had happened to make the Chinese economy seem any less unstable, unbalanced, uncoordinated and unsustainable….

The past three years have witnessed change at last: investment has fallen by 3 per cent of GDP, while public and private consumption have risen by much the same proportion. As a result, consumption has become a more important source of additional demand than investment. Thus, in 2017, notes a background paper to this year’s China Development Forum, final consumption contributed 59 per cent of GDP growth…. The rise in indebtedness has also (apparently) stopped. Behind this has been a willingness to substitute quality for quantity of growth…. While the shifts are slow and the full adjustment to more reasonable levels could take until the middle of the next decade, we are seeing early signs of the necessary change in the structure of the Chinese economy towards one that is less unbalanced and, above all, one that is more reliant on the consumer demand of China’s vast population. That would, in turn, be good for China and for the rest of the world….

The story told by former premier Wen is far from over. But we can now at least envisage a happy ending.

April 4, 2018


Brad DeLong
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