Is China’s Economy Rebalancing?

It is one thing to state that China needs to rebalance its economy, but it’s quite another thing to put that plan into practice. The difficulties involved in shifting from a growth model based on exports, heavy capital investment, labor intensive and high environmental costs activities to a model that is more reliant on domestic consumption cannot be underestimated.

While Beijing has officially set a new course for its economy, many difficulties remain, not least because slowing down investment without creating a sharp deceleration is a balancing act. In addition, some provinces are still reluctant to align themselves to this policy in order to avoid a slowdown themselves.

But is Beijing’s rebalancing strategy working? What are the major risks and uncertainties involved, given that the global economy remains volatile? And what are the key indicators to watch for in order to assess how the rebalancing strategy is panning out?

At the recent FutureChina Global Forum in Singapore, CKGSB Founding Dean and Professor of China Business and Globalization, Xiang Bing was joined by Michael Pettis, Professor of International Finance, Guanghua School of Management, Fu Jun, Executive Dean & Professor, School of Government, Peking University and Wang Jianye, Visiting Professor of Economics, NYU Shanghai to further this fascinating debate and evaluate what this rebalancing means for longer-term prospects.

Left to right: Wang Jianye, Visiting Professor of Economics at NYU Shanghai, and Xiang Bing, CKGSB Founding Dean and Professor of China Business and Globalization

Pettis struck at the core of the problem, by saying that there is confusion over what this very rebalancing act actually is, though his preferred definition centers on the shift from investment to consumption. But he argued that a massive increase in investment is unsustainable because it inevitably leads to a debt problem.

While Pettis is long known to be a China bear, Dean Xiang professed himself to be optimistic about China’s future, despite its limitations, pointing to both its low urbanization rate and the fact that its service industry accounts for far less of its GDP than many other more developed countries as two significant reasons for further growth potential. As the largest contributor to global economic growth, Xiang said that China’s population dividend will continue and that further deregulation can also increase its rate of growth.

Wang later talked about the institutional reform of the public finance system, while Fu focused on corruption and the polarization of wealth as two issues that China needs to address. Xiang also stressed that China needs to explain itself better so as not to be perceived as a threat, but said that, given its dependence on global trade, China has every incentive to make peace with other countries.

It was a lively debate and one that could have continued long after the allotted time ran out.

Left to right: George Chen, Financial Editor, South China Morning Post; Fu Jun, Executive Dean & Professor, School of Government, Peking University; Michael Pettis, Professor of International Finance, Guanghua School of Management; Wang Jianye, Visiting Professor of Economics, NYU Shanghai; and Xiang Bing, Founding Dean and Professor of China Business and Globalization, CKGSB