China economic rebalancing will take at least 10 years

Economic growth

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Wang XiaoluWe must all hope that new economic policies now being implemented in China are successful.  The alternative, of a debt implosion, is too awful to contemplate.  But as China’s state-owned media continually remind us, the transition is likely to prove extremely difficult.

An important interview with the deputy head of the National Economic Research Institute, Wang Xiaolu  (pictured above), highlights the enormous challenges ahead:

I think you can see some initial rebalancing of the economy over the past couple of years. No one quarter would define rebalancing since it is very much a long-term, rather than short-term process”.

Wang argues consumption will have rise to around 60% of GDP (versus today’s level of below 50%), before significant rebalancing will have occurred.  He says this will take at least 10 years, and probably longer.

I expect it will gradually happen over the next 10 years but it will depend on the success of institutional reforms as to how the patterns of income distribution will be readjusted“.

At the same time, he believes there are huge risks if China’s economic rebalancing fails to occur.

The continuation of the current situation would result in a very bad situation for China because current levels of economic growth would not be sustained. It would lead to many problems such as a lack of funding for public services, debt issues and also higher levels of unemployment.”

What we need for rebalancing is a lower savings rate and lower investment rate, and higher household consumption and these need to be permanent features.”

Wang also points out that the previous government’s Rmb 4tn ($660 billion) stimulus was one of the largest in history, and worsened the existing imbalances:

Many government investment programs resulted in bubbles and debt problems. We need to learn lessons from the financial crisis because there was certainly over-investment in the economy.”

Wang also argues that the stimulus, and the $10tn lending programme, has “exposed a local government funding problem (many cities and towns in China remain seriously in debt), which needs to be resolved as part of the rebalancing process”.

Local governments rely too much on land sales for funding. It is not sustainable because land is limited and you cannot sell it forever. Land sales are not well monitored or transparent. Local governments need to be able to raise money in local taxes and be less reliant on central government”.

This important interview confirms that the new leadership realises there is no alternative to the 10-year plan that it unveiled at the Third Plenum last year.

As we will discuss in 9 September’s free webinar, we cannot know if they will be successful.  But at least they have recognised the risks of continuing with the previous stimulus policies.  This is something that has yet to dawn on policymakers in the West and Japan.

 

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