## China’s Growth: Why Less is More

_IMF Blog, October 29, 2013_

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## Bibliographic details
- Authors: Steven Barnett
- Published: October 29, 2013

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### Current model is not sustainable
- Borrow and invest supports growth in the short run, but eventually debt rises, investment becomes less productive, and risks increase.
- China’s economy still has considerable buffers; risks to the outlook in the near-term are described as extremely low.
- Emerging vulnerabilities:
  - Surging credit: a broad measure of credit (total social financing) had held steady at about 130 percent of GDP for much of the 2000s; since 2008, it has shot up to around 200 percent of GDP; an increase of 70 percent of GDP in 4½ years.
  - Strains on local government finances.
  - Weakening balance sheets in parts of the corporate sector.
- Investment dynamics:
  - Investment accounts for nearly half of the economy’s output, which is among the highest in the world and high relative to the historical experience of other fast growing economies.
  - As more output goes into investment, less goes into consumption; in the past decade consumption’s share of output has declined significantly.
- Policy implication: reversing the decline in consumption’s share requires rebalancing growth away from investment and towards consumption.

### More balanced and sustainable growth
- Core reforms emphasized:
  - Further strengthening of the financial sector.
  - Opening the service sector to more competition.
- Expected effects of reforms:
  - A more market-based financial system will better channel household savings to productive uses, providing more credit to dynamic start-ups in the service sector.
  - Greater competition in services (healthcare, education, financial services, logistics, utilities, telecom) would allow start-ups to emerge and create jobs.
  - The service sector is more labor intensive than industry; more labor intensive growth means higher household income and more consumption.
  - Financial sector reform would boost household income from investments directly; currently bank deposits often offer zero or negative returns when adjusted for inflation, whereas a more market-based system would improve returns for households.
- Analogy: Done together, these reforms could provide a one-two punch analogous to state enterprise reform in the late 1990s and joining the World Trade Organization, which propelled growth in the 2000s.

### Slower but better
- Tradeoffs and transition costs:
  - Taming rising risks—by reigning in credit growth and rationalizing investment—will likely slow the economy in the coming years.
  - Less stimulus means less growth; reform itself could entail adjustment costs with some short run impact on growth.
- Growth projections and scenarios:
  - With reforms, China’s growth could average around 6 percent a year from now to 2030.
  - By contrast, a status-quo scenario could result in China getting stuck in the middle-income trap, with income per person peaking at around 25 percent of that in the United States in 2030.
  - With successful reforms, income per person in China could reach 40 percent of the U.S. level by 2030.
  - Note on perspective: by most measures—except China’s 10 percent average annual growth over the past 30 years—averaging around 6 percent a year would be a fantastic outcome.

### Good for China and Good for the World
- Near-term slower growth is framed as a tradeoff worth making for higher future income.
- By 2030, China—especially with successful reforms—will almost certainly be the world’s largest economy.
- China’s success will substantially increase income in China and mean much higher global demand, which will be hugely important for a robust and healthy global economy.
- Concluding message: Less growth in China today in exchange for more, much more, income in the future—so, less is indeed more.

*Credit: Steven Barnett, October 29, 2013*

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## Content in this bundle

- **iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日**
  - [iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日 (Markdown version)](/external/chinese/np/blog/2013/102913c.pdf.md){rel="alternate" type="text/markdown"}
  - [iMFdirect博客: 中国的经济增长：为什么慢一些反而可能好? 2013年10月29日 (PDF)](/external/chinese/np/blog/2013/102913c.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2013/10/29/chinas-growth-why-less-is-more_