MAPI: China's Growth Model Faces Challenges

ARLINGTON, Va. -- China has expanded at an annual growth rate of 10 percent over the past three decades, but in recent years it has become obvious that China's industry-led, capital intensive growth model with high savings and investments rates comes at a price, says the Manufacturers Alliance/MAPI.

Although the Chinese government is trying to stimulate consumption and constrain investment spending, China's savings-investment gap has widened and its trade surplus continues to expand. As a result, domestic consumption in China is at historically low levels and imports into China remain to weak to help stimulate the global economy or help the U.S. correct its unsustainable trade deficit.

“China’s real economy has been hit hard by the continued global turmoil and economic crisis, and there is much talk that China should use the crisis as a broad catalyst to accelerate the pace of reform,” said Yingying Xu, MAPI Economist. “The progress of the transition, however, will not likely be fast and smooth. This is due to resistance from many vested interest groups who benefit from the old growth model and thus push for the status quo, as well as the complexity of tasks lying ahead.”

One of the main factors behind China's rapid growth has been the significant increase in the rate of capital accumulation in the industrial sector. Investment has exceeded 42 percent since 2003. However, the contribution of domestic demand to economic growth has been declining steadily. Commensurate with China’s low consumption-to-GDP ratio is its high domestic savings, which outpaced investment growth and reached an unprecedented 50 percent of GDP in 2007.

China’s top leaders formally called for a rebalancing of the country’s growth sources in 2004, promoting more household consumption, spending on the social safety net, and expansion of the service sector to grow the economy at a more sustainable and equitable pace.  Despite these efforts, the trade surplus jumped from less than 3 percent in previous years to 5.6 percent of GDP in 2005 and to 9.4 percent in 2007.

One important step in the rebalancing of the economy regards China’s currency.  Xu writes that further appreciation of the Yuan will increase competition from imports and diminish export markets. This will reduce the growth of savings by stimulating household consumption, slow down domestic output growth, and help resolve the global imbalance problem.

“China’s rebalancing road has proven to be more challenging than initially expected,” Xu said, and she predicts a changing dynamic for business ventures.  “Multinational firms will need to cooperate with Chinese firms in more creative ways to meet the country’s growing domestic demand when they both are facing a tougher business environment in China.”

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