Michael Pettis, Beijing-based economist and Senior Fellow at Carnegie Endowment, delivered the opening keynote at China Week 2024 arguing that China’s economic model remains fundamentally unbalanced, with implications for both domestic growth and the global economy.
He said China’s unusually low level of household consumption as a share of GDP is a problem that Chinese policymakers have acknowledged for more than a decade but have struggled to fix. Rather than a consumption-driven growth model, China has relied heavily on high levels of investment and persistent trade surpluses to sustain is economic expansion - “China has been investing more than 40% of its GDP – almost twice the global average of 25%. This highlights how extraordinarily dependent China is on the growth of investment”.
To bring investment down rapidly, China would need to see its consumption levels rise substantially or risk a surge in debt. How can the country increase its consumption? One way of doing this, says Pettis, would be to convince Chinese households to save less, increasing household debt. Another way is to have the Chinese Government borrow money and distribute it to households to enable them to consume more.
Will China do it? Pettis believes it will happen. But the investment would need to be in the tens of trillions. A permanent solution would be to restructure the economy. Otherwise, China’s excess savings and production will continue to spill over into the global economy, affecting trade partners and contributing to international economic friction. While rebalancing remains an official policy goal, entrenched institutional and political constraints make meaningful change difficult.