China takes rebalancing commitment to a new level

By Stephen S. Roach Source:Global Times Published: 2017/11/5 22:08:40

Illustration: Luo Xuan/GT


The Chinese economy is at a critical juncture. In some respects, this is very reminiscent of the stark challenges China faced in the late 1970s. The reforms and opening up of Deng Xiaoping were a courageous response to those tough circumstances that put China on an unprecedented path of growth and development.  

But nearly four decades of extraordinary progress cannot be taken for granted in looking to the future. That is especially the case as China now enters the long dreaded zone of the "middle-income trap" - hitting a threshold of economic development that has stymied most nations. While today's circumstances are not nearly as dire as they were in the late 1970s, the challenge of sustainability is equally profound.

To its credit, the Chinese leadership has openly debated this very challenge. The government has endorsed a major strategic shift in the direction of its economy, with recent reforms aiming toward a rebalancing from a manufacturing-led impetus of investment and exports to more of a services-led consumption dynamic. 

Consistent with the vision of General Secretary of the Central Committee of the Communist Party of China (CPC) Xi Jinping for this new era, rebalancing has been enshrined as an obvious and important resolution to the so-called principal contradiction between unbalanced and inadequate development, on the one hand, and the growing needs of the people, on the other hand. As the first revision to the principal contradiction in some 36 years, rebalancing is no longer just an analytical solution to an economic problem. It is now an essential ingredient of the Party's constitutional commitment to the aspirational goals it seeks to achieve by 2050.

By framing rebalancing in both analytical and ideological terms, there can be no mistaking the high priority of implementing the policies and reforms that are central to this strategy.  Nor can there be any doubt of the potential difficulties that will be encountered along the way. Two aspects of that challenge look particularly daunting:

First, there are the legacy effects of worrisome distortions in the internal structure of the Chinese economy. Underpinned by the time-honored capital-for-labor substitution recipe of manufacturing productivity enhancement, China has required increasingly faster output growth to absorb its vast reservoir of surplus labor. The hyper-growth solution of 10 percent average GDP growth over the 30-year period from 1980 to 2010 enabled great success at poverty reduction, but it also led to excess consumption of energy and other natural resources, spawning wrenching problems of environmental degradation and pollution. At the same time, as China focused its economic development on achieving prowess as the world's "ultimate producer," there was a concomitant repression of household consumption - along with a mounting excess of saving that underpinned the nation's outsize current account and trade surpluses.  Rebalancing is the only effective strategy to address these internal distortions.

Second, China's producer model has not only led to internal imbalances but its over-reliance on exports and external demand has spawned a new vulnerability. That has become particularly evident in light of the shortfall in global trade that has occurred in the aftermath of the Great Financial Crisis of 2008-09. Indeed, the historical trend in global trade growth of 6 percent over the 1980 to 2008 period has been cut in half to just 3 percent since 2009 - underscoring a major erosion of the external demand base for Chinese exports.

These two developments - the legacy of 30 years of mounting internal imbalances in conjunction with a lasting post-crisis shortfall of external demand - put today's Chinese economy at a critical tipping point that is very reminiscent of that faced by Deng Xiaoping when he addressed the Third Plenary Session of the 11th Central Committee of Communist Party of China in1978. Just as a dysfunctional economic growth model needed to be overhauled back then, the same is the case today. And just as the failure to act was not an option back then, a major setback would pose a comparable threat today. 

Of course, the two sets of circumstances are very different - today's per capita income in China is over 25 times the impoverished levels of 1980. But a stalling of economic development would nevertheless come as a huge disappointment for the nation.

China's basic strategy is not in doubt. Further rebalancing toward services, consumer demand and indigenous innovation are all essential ingredients of the Next China. From a macroeconomic perspective, the outcome will entail a shift from surplus saving to saving absorption - as China increasingly deploys its vast financial resources to fund its social safety net. That's particularly true of under-funded retirement and healthcare programs, both of which are vital to support a rapidly aging, moderately well-off society. 

The Chinese leadership must now come face-to-face with the urgency of this transition. The combination of persistent internal imbalances and a protracted external shock can only raise the probability that China might get ensnared in the middle-income trap.  China has the strategy to avoid such an outcome. But in the end, strategy is nothing without implementation - underwritten by the political will of commitment. The 19th Party Congress has taken that commitment to a new and important level.    

The author is former Asia chairman at Morgan Stanley and the author of Unbalanced: The Codependency of America and China (2014). He is currently on the faculty at Yale University.


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