CHINA’S REBALANCING ACT

TIME RUNNING OUT FOR CHINA TO COMPLETE REBALANCING ACT

Charlie Fell

The Irish Times, December 18, 2012

Serious Money: The world’s financial markets are focused on the US administration’s negotiations to avoid the fiscal cliff, as well as policymakers’ efforts in the euro zone to effect reform and draw a line under the region’s ongoing crisis. What each means for economic growth in 2013 and beyond is of enormous concern, but more attention should be paid to China, the world’s primary growth engine, as it addresses the urgent need to rebalance its lop-sided economy.

China has enjoyed spectacular growth since Deng Xiaoping set the economy on an export path in 1978. GDP growth has averaged close to 10 per cent a year over the past three decades, and living standards have increased by a factor of 13 over the same period.

The economic performance was fuelled by large-scale investment in physical capital, facilitated by high gross domestic savings rates channelled through state-owned banks, largely to state-owned enterprises. For most of the past three decades, the country’s investment rate has not been out-of-line with the precedent set by its high-achieving Asian neighbours during their corresponding periods of economic development.

The investment share of GDP averaged close to 35 per cent during the latter half of the 1970s through the 1980s, and increased to an average of 39 per cent in the 1990s. These figures are like the average investment rate of 33 per cent registered in Japan between 1961 and 1973, or the 32 per cent average recorded in South Korea from 1983 to 1991.

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