China’s Next Stage: Spreading the Wealth

The New York Times’ Room for Debate blog has rounded up a number of scholars to share their thoughts on China’s efforts to move towards a consumer-driven economy.

Michael Pettis, professor of finance at Peking University, gives his take:

Since the contraction of the U.S. trade deficit almost certainly means that in the medium term China’s growth will be limited by its domestic consumption growth, Beijing has embarked, almost desperately, on a number of policies to goose domestic consumption.

Will these policies work? Perhaps in very specific cases they will cause consumption to increase, but in general Chinese consumption is unlikely to accelerate unless the government reverses policies that forced households to subsidize inefficient producers. But reversing those policies would almost certainly cause unemployment to rise in the short term.

So Beijing is doing the opposite. To prevent rising unemployment caused by the collapse in exports, Beijing has increased the subsidies and support for domestic manufacturing while sharply increasing China’s already-record-breaking levels of investment. It is almost certain that much of the new investment will generate low or even negative returns.

This will not help rebalance the economy. As long as Chinese households must subsidize large amounts of inefficient investment, it will be hard for consumption to take off.


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