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IMF Survey: China's Difficult Rebalancing Act

September 12, 2007

Most economists agree that if China is to continue its strong economic growth it must rebalance its economy to rely less on investment and exports and more on domestic consumption.

China's Difficult Rebalancing Act

Shoppers look for bargains in a Chinese discount store: economists are looking to Chinese consumers to spend more (photo: Mark Ralston/AFP)

Booming economy

The question is whether that rebalancing will happen on its own, the result of the natural course of the business cycle, or whether it will require concerted policy actions on the part of the Chinese government.

This is one of the issues explored in a group of articles in the September issue of the IMF's quarterly magazine Finance & Development, which also examines the dramatic changes in China's export structure.

In the past 20 years, China has added about $2 trillion to world GDP, created 120 million new jobs, and pulled 400 million people out of poverty. These are big numbers—equivalent to adding a country of the economic size of Portugal every year; creating as many new jobs each year as the total number of people employed in Australia; and eradicating poverty in Ethiopia, Nigeria, Tanzania, and Zambia combined. In recent years, China has grown more than 10 percent annually while keeping inflation below 3 percent. Today, it is the fourth largest economy in the world and the third largest trading nation.

Despite these remarkable achievements, there is growing unease within China and abroad about the state of its economy. At the National People's Congress this March, Premier Wen Jiabao cautioned, "the biggest problem with China's economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable." More generally, the question is whether the pace of growth is sustainable or whether the imbalances in the economy might slow growth, perhaps significantly. And this is why China's policymakers are looking to rebalance the economy to rely less on exports and investment and more on consumption as the source of growth.

More sophisticated exports

Articles in the package look at the rebalancing conundrum as well as China's changing exports. Exports have increased 10-fold over the past 15 years as the country became the third-biggest exporter behind Germany and the United States. No longer is China merely the world's workshop, assembling imported inputs into low-tech exports. Instead, the country is selling increasingly complex products that rely heavily on its own domestic inputs. But as China moves away from being the low-cost, low-tech assembler, its fortunes become more closely tied to those of the global economy.

In a separate article, Hu Xiaolian, the Deputy Governor of the People's Bank of China, explains China's approach to development and economic reform, including efforts to promote consumption and consumer credit, reform the exchange rate regime, and improve macroeconomic management.

Read the group of articles:

China's Rebalancing Act
Jahangir Aziz and Steven Dunaway

China's economic miracle may be at risk unless the country relies more on domestic consumption. But a rebalancing of the economy is unlikely to happen on its own. What's needed is adjustment based on monetary policy, price liberalization, financial market reform, and changes in government expenditure policies.

Solving China's Rebalancing Puzzle
Jonathan Anderson

Market forces will do the trick "naturally." Real rebalancing involves a slowdown in investment and a drop in net exports rather than a further pickup in urban consumption, and this is by far the most likely scenario through the end of the current decade.

China's Export Boom
Mary Amiti and Caroline Freund

China's exports are not only booming, they are also becoming more sophisticated. An IMF study shows China moving out of agriculture, apparel, and textiles into electronics and machinery.

China's Growing External Dependence
Li Cui

China is no longer just an assembler of imported inputs. The domestic content of China's exports is increasing and its economic fortunes are increasingly tied to those of the global economy.

Point of View
China's Approach to Reform

Hu Xiaolian

The Deputy Governor of the People's Bank of China gives an account of China's approach to development and economic reform, including efforts to promote consumption and consumer credit, reform the exchange rate regime, and improve macroeconomic management.