China on the way back to rebalancing

Focus shifts from pandemic recovery

China’s economy keeps recovering from the coronavirus pandemic-led crisis. Gross domestic product grew by 3.2% in the second quarter, after falling by 6.8% in the first, compared to a year before. It is now the only major economy expected to grow this year. Successful containment of the pandemic has allowed it to be first in, first out.

One feature in common with other countries, however, is the unbalanced shape of the recovery. The supply side has run ahead of the demand side. Factories started reopening in February, which made a steady return of industrial output, which grew by 5.6% on an annual basis in August, possible. Overall domestic consumption lagged during the first half of 2020.

Fixed investment has picked up and the gradual rise of global trade activity is helping exports. The uptick in retail sales in August, rising faster than industrial production, suggests a broadening of domestic consumption and a catch up with production.

As China’s economy marches toward normalisation, it might move from its previous trajectory, particularly as the post-crisis global economy is expected to have a ‘new normal’. To what extent might pressures toward ‘relative deglobalisation’ bring a need for China to review its development path? If anything, the post-coronavirus global economy will reinforce China’s need to speed up its rebalancing.

China’s growth trajectory has been rebalancing to a new pattern, where domestic consumption is rising relative to investments and exports. A drive toward consolidating rising shares of value-added in global chains is taking place. Services should rise relative to manufacturing.

Waves of credit-driven over-investment in infrastructure and housing, after the 2008 financial crisis, helped sustain growth, but there is a perception that that lever is temporarily exhausted. Declining GDP growth rates, to 6% last year and likely 4% in the future from double digits in previous decades, would be the counterpart to rising wages, domestic mass consumption and the transition to services and high tech.

The transition toward a less investment- and export-dependent growth model has been taking place from a starting point of an exceptionally low consumption-to-GDP ratio. Besides high profit-to-wages ratios, low levels of public social spending lead to high household savings. In 2017, private consumption and investment were, respectively, 39% and 44% of GDP, whereas the rest of the world had a 60% consumption-to-GDP ratio.

The global economy’s ‘new normal’ exhibits an even less friendly-to-trade environment than in recent years. The pay-off from shifting from a reliance on export growth to domestic consumption will be high. Over the past two years, with the US-initiated trade war, investors from Japan and the US have accelerated the transfer of assembly lines and supply contracts to Vietnam, Thailand, Indonesia and, to a lesser extent, Mexico from China. This may be taken as a sign, regardless of whether trade tensions subside.

A second challenge is, of course, on the technology and value-added fronts. China has done its homework in terms of investments in education and infrastructure, and can creatively absorb technology. It has now reached the top of the ladder. Now new technology must be locally developed, as it is not available simply by using or adapting existing technologies. If anything, the incentive for China to speed up such a process will rise in the ‘new normal’ of the global economy.

China’s recovery from the deep pandemic dive is at full speed. Focus will increasingly turn back to its interrupted economic rebalancing.

Otaviano Canuto is a Senior Fellow at the Policy Center for the New South, a former Executive Director of the World Bank and a Member of the OMFIF Advisory Board. This is an edited version of an article originally published by the Center for Macroeconomics and Development.

Join Today

Connect with our membership team

Scroll to Top