Monday, July 23, 2012

China's Rebalancing Act

To increase consumer's contribution to GDP China must raise wages and cut the implicit tax savers pay. This won't happen without a hit to growth. Can it happen at all under the current environment? (The article writer sounds downright optimistic.) A slowdown is good for China and the world
And this seems to be happening. Beijing has reduced interest rates twice this year and reluctant policy makers are under intense pressure to reduce them further, but with inflation falling much more quickly than interest rates, the real return for household depositors has soared in recent months, as has the real cost of borrowing. China is repairing one of its worst distortions.
China’s investment growth rate must fall for many years before the household income share of GDP is high enough for consumption to replace investment as the engine of growth.
Can it do that on the back of a collapsing asset price bubble?
But won’t slower growth create social dislocation in China and economic dislocation around the world? No, not if it is managed well. Remember that Chinese rebalancing requires household to income grow faster than GDP for many years, and if Chinese growth slows even to 3 per cent, as I expect it will, but household income continues growing at 5-6 per cent, this is far from being socially disruptive.

1 comment:

jesse said...

Pettis is not someone I would bet against.