- China’s recent economic difficulties reflect Beijing’s long-running desire to shift from an investment- and export-led economic model to a consumption-led one.
- This ‘rebalancing’ would smooth out China’s struggles with economic instability, income inequality, and overreliance on foreign imports – all while supporting global growth by providing the world a new and much-needed source of demand.
- However, dismantling the policy framework that underlies China’s export- and investment-led model would require a large-scale redistribution of resources that is proving too politically unpalatable for Beijing to undertake beyond symbolic measures.
China’s debt crisis is spreading, the scrutiny on wealthy corporations is growing and the crackdown on elites is accelerating. It has been an eventful few months for China’s economy, and the difficulties are not expected to end soon. Last month, the IMF projected China’s GDP growth to fall to 5.6 percent next year, its lowest pre-pandemic growth rate since 1990. Yet even as the pain and pressure build, there seems to be some sound policymaking underlying it all.
For the past decade and a half, officials have been outspoken about the need to “rebalance” China’s economy from an investment- and export-led model to a consumption-led one. Doing so would help resolve China’s recurring bouts of financial instability, recently evidenced by the Evergrande implosion, as well as the long-running problem of inequality, the focus of Chinese president Xi Jinping’s new “Common Prosperity” campaign. Moreover, recentering the economy on domestic consumption would allow for robust growth that is less reliant on foreign consumption – which has proven problematic as overseas buyers are both politically unwilling and economically incapable of engaging in unrestricted commerce with China.
Flexing the power of the party over elites, refusing to bail out bloated firms and calling attention to wealth disparities has reflected Beijing’s new seriousness about this rebalancing. However, there is still much more work to be done. Without dismantling the policy framework that entrenches the reigning investment- and export-led model, China’s economy will be stuck with the same instability, inequality and vulnerability it wrestles with today.
This may seem an unfair depiction of China’s economy, but it is one which senior policymakers have long acknowledged. In 2007, Premier Wen Jiabao famously criticised China’s growth as “unstable, unbalanced, uncoordinated, and unsustainable.” These “Four Uns” were a powerful indictment and call-to-action at the time, but the problems went unaddressed. In 2010, Vice Premier Li Keqiang again lamented China’s “irrational economic structure” and argued that “uncoordinated and unsustainable development is increasingly apparent.” This past July, Xi similarly called for a “new stage of development” with the pointed aim of “pursuing genuine rather than inflated GDP growth.”
What these statements take issue with is no small matter: it is the Chinese economic model itself. For the past three decades, China’s economy has been defined by persistent trade surpluses that have defied basic economic expectations and carried severe economic consequences.
In theory, trade surpluses should not last very long – and never as long as China’s thirty-year streak. This is because a rise in exports should lead to a rise in the value of the exporter’s currency, higher earnings among exporting firms should result in higher local wages, and higher local wages should produce higher domestic consumption. In turn, a stronger currency, steeper input costs (i.e., wages), and greater consumption of foreign and domestic goods would automatically reduce China’s export advantages and push down its trade surplus. This gradual reduction in a country’s trade surplus, it should be noted, is good. Not only would it bring greater stability and equality to a boom-and-bust, wage-repressed system that requires the opposite of these economic virtues, China’s shift from a net absorber of global demand (i.e., exporting goods throughout the world) to a net producer of global demand (i.e., buying up the word’s goods) would make room for other countries to ascend the ‘development ladder’.
Yet in China none of this has happened to any meaningful degree. The renminbi has stayed flat with the dollar over the past decade despite the U.S.’ ballooning trade deficit with China. Chinese wages did double in the decade leading up to the pandemic, but GDP more than tripled, demonstrating that workers earn less and less of the value that they produce. As a result, consumption has barely budged as a percentage of GDP. China’s ratio stands at just 39%, far below the 60% average for other major economies.
This tells us primarily about the dire state of inequality in China, as the repression of China’s currency and wage growth have held down Chinese consumption and therefore living standards. But this also paints an important macroeconomic picture. With little consumption, China experiences little “genuine” growth – to use Xi’s terminology – and so authorities rush through any investment that can nominally support Beijing’s GDP growth target. At the same time, to make up for their low earnings households must borrow more to meet basic needs, such as housing. Unproductive investments and debt bubbles naturally follow.
These are precisely the practices Xi hopes to end. The dressing-down of elites such as Jack Ma and the refusal to bail out debt-laden firms such as Evergrande have demonstrated a desire to break with China’s old economic ways. By targeting the inequality underlying China’s economic problems and by seeking to increase domestic consumption, “Common Prosperity” also holds an economic logic that prior statements and initiatives have not.
Yet while the conditions for change are ripe, Common Prosperity is coming up short. Its success so far has been in compelling Chinese corporations to make charitable donations, such as Tencent’s and Alibaba’s pledges to give away $15 billion over the next few years. These are laudable sums, but they do not amount to the systemic redistribution of resources that China’s situation requires.
In China’s economic jargon, these donations are considered “tertiary distribution.” Beijing hopes such “tertiary distribution” donations will drive up consumption and rebalance the economy. Yet for an economy as large and populous as China’s, this is an unreasonable expectation. What is needed is “primary distribution,” a direct increase in wages, and “secondary distribution,” redistributive fiscal policy measures.
The problem for China’s economic rebalancing – where Xi’s progress is most likely to stop – lies in the political rebalancing that such primary and secondary distribution would entail. After all, a redistribution of resources is not simply a redistribution of resources. It is also a redistribution of power.
Labour unions must be empowered with greater bargaining rights. Workers must be empowered with higher incomes. Rural migrants must be empowered with the public benefits and living wages that they have long been deprived due to China’s notorious hukou system. And in turn, the famous “vested interests” behind Chinese corporations and state-owned enterprises that have long benefited from cheap and compliant labour will have to be disempowered.
Xi has expressed an important commitment to an economic rebalancing that does away with the deflationary and destabilising export- and investment-led model. But unless he shows a similar commitment to this political rebalancing – the redistribution of resources that is needed to increase domestic consumption – his “new stage of development” cannot succeed.
This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.