Carnegie Endowment for International Peace
Beijing’s economic policymakers largely accept that China must rebalance its economy so that growth is driven more by domestic consumption and less by investment. But once China begins to take seriously the need to rebalance its economy, China’s annual GDP growth is unlikely to exceed 2–3 percent for many years, unless there is a substantial increase in the growth rate of consumption.
It is a mistake to assume that there is a global capital and technology frontier toward which every country must strive to acquire development. Economic development requires, above all, the right set of formal and informal institutions.
U.S. households will likely respond to the shocks of the pandemic by increasing their savings rates, as will foreign households. If the U.S. government does not decisively increase spending, higher American household savings will force either American debt or unemployment to rise even more.
A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
Analysts are increasingly skeptical that China’s very high reported GDP growth rate provides a meaningful picture of the economy’s health. There are, however, at least three very different ways that reported GDP can fail to reflect the underlying economy.
A January 2018 Bloomberg article suggests that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
The three scenarios listed in a recent Financial Times article set out the range of plausible economic outcomes available to China. The most likely is that China experiences a long, but orderly, growth deceleration as it grinds away at its debt burden, but under easily specified conditions each of the three is possible.
China is embarking on ambitious economic reforms to boost its growth prospects. What is the rationale behind these new reforms and what are the prospects for their success?
For now, for all the excited chatter, the Asia Infrastructure Investment Bank is an institution laden with symbolic value and little else.
Policies that affect the savings rate of a small country can have more-or-less predictable domestic impacts because the global economy is so large that domestic policies are not affected by external constraints. But with a large economy, the analysis changes.
While debt plays a key role in understanding the recent evolution of the Chinese economy and the timing and process of any further adjustment, there seems to be a remarkable amount of confusion as to why debt matters.
As China's economy rebalances over the coming decade, average growth of 3-4 percent is likely to be the upper limit on what Beijing can achieve.
The Chinese growth model is not radically new. It is based primarily on the growth model developed by Japan in the twentieth century, and it has been implemented in various forms by many countries.
To assess China's rebalancing in 2013, look for how quickly growth slows, how much debt grows, and the movement of inflation and trade figures. Globally, keep on eye on Target 2, Spanish bonds, and Japanese debt.
The current cycle of globalization could end in a painful period of debt adjustment and payment imbalances across the globe, with a likely slowdown of growth in China, a possible abandonment of the euro, and the risk of increasing U.S. protectionism.
Although China's growth next year is likely to remain high, expectations for China's average growth over the next decade are being revised downward.