“Rebalancing remains at the forefront of Chinese and global policy debates…Notwithstanding the rise in global trade protectionism, the somewhat forgotten news these days is that there has been a large correction in China’s current account surplus, which has averaged a rather modest 1.9% of GDP over the past five years, compared to a peak of 10% in 2007.” (Art Woo, China: Rebalancing Under the Radar Progress, BMO Capital Markets, March 23, 2018)

China’s economy and its economic policies have received considerable attention not only because the country’s economic growth rate still remains remarkably high, but also because of the impact that China’s successes have had on the global economy.  

The impact of the China factor on the global economy has mostly been seen as negative. China’s economic growth miracle is often blamed for causing large scale job losses in the western world, creating foreign trade imbalances, and also influencing major geo-political changes using its economic investments abroad.

As Art Woo observes, “China’s investment/export-led growth model was not only considered to be the key contributor to its own domestic imbalances (i.e., high investment and low consumption) but also to global imbalances, namely America’s large current account deficit.”

However, some time ago China embarked on a deliberate program of attempting to restore a better internal economic balance by emphasizing domestic consumption at the expense of capital spending. To some extent a slow domestic reblancing of its economy is already evident, particularly as it spills over into the international markets.

As the following chart illlustrates, global imbalances among the key international players have recently been moderating, though no doubt, the unusually slow global recovery from the Great Recession may also be playing a role in this apparent moderation.

Indeed, China’s current account surplus, which was as high as 10% of GDP in 2007, has averaged a much more modest 1.9% of GDP over the past five years.

Woo expects the Chinese government to make slower progress on internal rebalancing between domestic conusumption and investment than on the international current account. China’s goal should be to raise the domestic consumption/GDP ratio (53.6% in 2016) and to lower the domestic investment/GDP ratio (44.2%). As the following table illustrates, progress in this direction has been slow, and is projected to continue to be slow into the future.  

The following simulation of China’s economic structure assumes continued gradual economic slowing with no major economic shocks. As such, it is the assumptions that drive the conclusions, though the economic assumptions seems reasonable.

Note in this simulation of China’s economy, the consumption ratio is projected to increase slowly, service production is also projected to expand slowly, and agricultural employment is also expected to shrink.  

As Woo points out, it is very difficult  to more rapidly generate higher consumption growth because of a number of cultural/political constraints.

The Chinese people have an unusually high domestic savings rate. Some of this is due to job insecurity and the fact that the labor share of income grows very slowly. The leftover influence of the One Child policy and rather inadequate public health and pension policies also boost the desire to save rather than spend.