China’s Shift to Consumption-Led Growth Can Aid Green Goals

IMF News, January 27, 2022

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China rebounded strongly from the pandemic, but growth is losing momentum while remaining overly dependent on support from investment and exports.
The IMF’s annual Article IV review’s key message: rebalancing toward a more consumption-based model will boost growth prospects in the short term and deliver high-quality expansion in the long run.
Rebalancing toward consumption will also help bring the country closer to achieving its climate goal of carbon neutrality before 2060.

Near-term headwinds:
- Slowing real estate investment.
- Rapid withdrawal of fiscal support.
- New outbreaks of more transmissible virus variants prompting more lockdowns, weighing on the recovery of private consumption.
Structural constraints:
- Stagnant domestic productivity growth, which has leveled off in the past 10 years just as China’s workforce stopped expanding.
- Waning benefits from traditional infrastructure spending.
- Technological decoupling reducing the flow of international trade in high-tech goods and services.
- A slowdown in trade and cross-border investment that is likely to be costly economically and can affect global growth.
Climate ambition adds another challenge to manage while rebalancing growth.

Fiscal policy (near term):
- Adopt a more neutral fiscal stance.
- Steer spending away from infrastructure and toward income support to vulnerable people to boost lagging private consumption.
Social protection:
- Improve the social protection system to offer people more security, reduce precautionary savings, and better promote consumption in the future.
Market and structural reforms:
- Re-energize economic reforms stalled by the pandemic to boost productivity and reverse faltering market dynamism.
- Empower private enterprises by letting private firms compete more with state-owned companies and continuing to open domestic markets.

Risks of continued investment-driven growth:
- Would accelerate the decline in investment returns.
- Due to the high carbon-intensity of investment, including from construction, would make it much harder for China to meet its climate goals.
Benefits of rebalancing toward consumption:
- Shifts activity to relatively untapped services industries and away from carbon-intensive industrial sectors.
- Decreases the energy intensity of China’s GDP, lessens the country’s energy demand and eases the pressure for energy security.
- Rebalancing alone can help cut carbon emissions by about 15 percent over the next three decades, as IMF staff simulations show.
Complementary measures:
- Climate policies combined with greener investment—which is more productive and growth-friendly than traditional spending—will steer demand away from emissions-intensive uses and support greener development.

Rebalancing supports both domestic high-quality growth and global climate aims.
Policies centered around economic rebalancing would ensure sustained high-quality growth is achievable and more durable, benefiting China and the world.

IMF Asia and Pacific Department; January 27, 2022. Authors: Chang Yong Rhee, Helge Berger, Wenjie Chen.