1. China is rapidly reaching the point of diminishing economic and political returns from its investment-driven model, which is headed for change one way or another: either through a proactive rebalancing, with reforms and policy adjustments, or a forced rebalancing precipitated by rising stresses in and beyond the financial system.
2. Rather than depending on the old growth engines of property development and exports, the emergence of new growth engines will lead the country through an extended period of rebalancing and ensure that growth is maintained. The structural transformation involves increased private consumption and a lower trade surplus.
3. China’s economic rebalancing can be viewed in terms of global trade balances and domestic dynamics. From a US-China rebalancing standpoint, China is intending to save less and spend more on consumption, while the US is spending less and saving more.
3. China’s economic rebalancing can be viewed in terms of global trade balances and domestic dynamics. From a US-China rebalancing standpoint, China is intending to save less and spend more on consumption, while the US is spending less and saving more.
EXCESS FROM PREVIOUS MODEL
1. There are various excesses arising from the old economic model — an oversupply of residential property, likely bad loans with the municipal governments and the state-owned banks, some overcapacity in the basic industrial sectors (steel and cement) — which need to be absorbed, or dealt with more directly.
2. The most important direct intervention is the proactive promotion of much higher environmental standards.
3. However the issues around non-performing loans and excessive local government debt require more attention than surplus production. They are an outcome of inappropriate local government behaviour and can, therefore, only be fundamentally addressed by central government intervention and other institutional reforms.
POLITICAL VIEWS
1. Short-term economic performance is no longer prioritized as reform, economic rebalancing and sustainability of economic growth is viewed by the leadership as critical to the health of the Communist Party and the regime.
2. Goverment's determination to realise a rebalanced growth model is evident in the anti-corruption campaign and the big clean-outs that have taken place in SOEs.
CHALLENGES FRO THE NEW MODEL
1. Dismantling old models of growth before new ones are developed raises the risk of a hard landing. While the traditional industry and investment-led growth model is fading, there are no new drivers on a comparable scale to take its place.
2. It is very hard to develop new drivers of growth in a downturn. Regions found it impossible to expand the services sector or consumer spending as its economy splutters. Funding investment in new industries during a downturn has proven equally difficult.
FIGURES FROM FINANCIAL TIMES MID 2015
1. GDP growth fell to 3.4 per cent year on year in the first quarter of 2015.
2. For the services sector, GDP growth in the tertiary sector in the northeast dropped 1.8 percentage points in 2014, far faster than the 0.2 percentage point drop recorded nationwide.
3. Noted a sharp slowdown in consumer spending in mid 2015. Annual growth in retail sales of consumer goods in the region fell from 12.1 per cent in 2014 to 7.1 per cent in the first quarter of 2015. That was well below the 10.9 per cent annual increase recorded in the rest of the country.
4. Local government fiscal revenues fell 23.3 per cent year on year in the first quarter; infrastructure investment fell 4.7 per cent, compared with 23.9 per cent growth in the rest of the country.
THOUGHTS
1. China needs time to develop new drivers of growth. Meanwhile, it must keep its old economic model ticking over, not least because a hard landing would make developing an alternative system even more difficult.
2. Another factor is China's wealth gap would pose a challenge in rebalancing towards a consumption led economy.
3. For regions badly affected by the new models, How will the central goverment prop them up?
4. Will the central government encourage local service-sector growth by offering subsidized loans to private firms (thereby developing new sources of economic activity while temporarily reflating "old" engines of growth)?
5. Will local state-owned firms (those self-same "old" engines of growth) continue hogging up financial sector resources or, worse yet, squeeze out private operators that might be encouraged by central government programs?
6. The services sector in some regions did not expand to fill the gap left by the industrial sector could be due to a lack of demand due to its extreme wealth gap in affected regions.
