WHO'S AFRAID OF CHINA'S BIG BAD REBALANCING?
Business Spectator, January 31, 2013
China’s GDP growth this year is now expected to exceed 8 per cent according to Lou Jiwei, the head of CIC, China’s biggest sovereign wealth fund. Last year, China accounted for about a third of global growth. This year, with shrinking economies in Europe and Japan and, despite firm signs of recovery, still lacklusture growth in the US, China is likely to contribute more again.
It is prudent then to consider what are the main downside risks to China’s growth outlook. China has demonstrated over recent years that domestic demand is more than capable of making up for a comparatively weak export performance. The risk of political shocks can be set aside – though ever present, the probability of one destablising the economy in the short to medium term must be considered very low.
Some economists – more so among foreigners than locals – are concerned about the great imbalance between savings and investment in China as a result of deliberate government policies to repress consumption. The result via the savings and investment identity in GDP accounting is accumulating external surpluses. That is to say, output which is neither consumed nor used in investment ends up as exports.
The leading proponent of this view is Michael Pettis, a Beijing-based economist and scholar. He has recently published a new book setting out his arguments. In The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy Pettis argues that that with rising levels of debt in China a sharp and disruptive correction will be inevitable.
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