NEW YORK — China’s high growth is creating a national and international economic imbalance and is not sustainable, according to a report from The Conference Board.
The Chinese government has recognized the risks of the country’s current growth forecast and is taking measures to address it, but it faces a difficult road to reverse the trend.
“Although the current situation is not sustainable, it is likely to continue for the foreseeable future in the absence of much more aggressive efforts to force change,” says Pieter Bottelier, Professor of China Studies at Johns Hopkins School of Advanced International Studies and Senior Advisor to The Conference Board.
The report cites steel and steel products, heavy machinery, textiles, garments and electronics as the main players behind the widening trade surplus.
“China’s fast growth and rapidly expanding trade surplus are driven by a number of factors that together have created a momentum that is hard to slow and may intensify internal and external economic imbalances for some years,” says Gail Fosler, President and Chief Economist of The Conference Board.
China has been relying strongly on capital formation and net exports to sustain strong growth, which is a serious macro-economic problem. The government has been trying to increase consumer spending, but wages and household disposable income continue to lag GDP and investment growth.
China also suffers from social inequality with a vast urban/rural income gap, and environmental pollution has been made worse by the industrial imbalance in favor of heavy industry.
To help correct the country’s growth forecast, The Conference Board expects a decline in corporate profits due to rising labor costs, an appreciating exchange rate, and rising land and utility costs to have an effect at some point, though the cycle of high profits and high investment is intensifying.
The country will most likely continue to see global cost advantages in many industries for years to come. Internal and external imbalances will probably grow significantly before the current cycle ends.
The external and internal economic imbalances indicate there is heavy investment in manufacturing and not enough investment in social infrastructure like health, education, social security, low-cost housing and environmental cleanup.
The report also suggests that additional measures for slowing investment growth in manufacturing are necessary.
“If current dynamics are allowed to continue, the trade surplus, which may exceed 9 percent of GDP this year, is likely to balloon, which will intensify international trade frictions with unpredictable consequences,” the report concludes.
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