IMF Survey: China's Difficult Rebalancing Act

IMF News, September 12, 2007

Source details

China's economic miracle may be at risk unless the country relies more on domestic consumption.
The question is whether rebalancing will occur naturally through the business cycle or require concerted policy actions by the Chinese government.
The September issue of the IMF's Finance & Development magazine examines the rebalancing conundrum and 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;
- pulled 400 million people out of poverty.
These achievements are framed as 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;
- eradicating poverty in Ethiopia, Nigeria, Tanzania, and Zambia combined.
Recent performance:
- China has grown more than 10 percent annually while keeping inflation below 3 percent.
- Today, China is the fourth largest economy in the world and the third largest trading nation.
Growing unease: policymakers and observers worry that growth is "unstable, unbalanced, uncoordinated, and unsustainable" (Premier Wen Jiabao).

Exports have increased 10-fold over the past 15 years as China became the third-biggest exporter behind Germany and the United States.
China is shifting from low-tech assembly of imported inputs to selling increasingly complex products that rely heavily on domestic inputs.
As China moves away from being the low-cost, low-tech assembler, its fortunes become more closely tied to those of the global economy.
The domestic content of China's exports is increasing, raising external dependence.

China's Rebalancing Act (Jahangir Aziz and Steven Dunaway)
- A rebalancing of the economy is unlikely to happen on its own.
- Needed adjustments include:
- monetary policy;
- price liberalization;
- financial market reform;
- changes in government expenditure policies.
Solving China's Rebalancing Puzzle (Jonathan Anderson)
- Market forces will operate "naturally."
- Real rebalancing involves a slowdown in investment and a drop in net exports rather than a further pickup in urban consumption.
- This scenario is described as "by far the most likely scenario through the end of the current decade."
China’s Export Boom (Mary Amiti and Caroline Freund)
- China is 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; domestic content of exports is rising and economic fortunes are more tied to the global economy.
Point of View — China’s Approach to Reform (Hu Xiaolian)
- Describes efforts to promote consumption and consumer credit, reform the exchange rate regime, and improve macroeconomic management.

IMF Survey: China's Difficult Rebalancing Act — September 12, 2007