From Arthur Kroeber, in China Economic Quarterly “Economic rebalancing –
Twin peaks: fiscal and financial reform” [not online]:
A major theme of recent discussions of China’s economy is the need for “rebalancing” — a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern
where consumer spending plays a bigger role.
The house view on this hot topic is straightforward. We believe that China’s
external “imbalance” — a current account surplus that peaked at over 11% of GDP in 2007 — mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly
secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure
investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. If these reforms occur — and some are already underway — then exchange-rate policy can play a useful supporting role. If they do not, currency revaluation by itself will accomplish little.
For a recent debate on Yuan revaluation, see here.
Kroeber highlights the implications of the Lewis-Fei-Ranis dual economy model, wherein expanding labor demand eventually induces rising labor costs (e.g., [NYT]; this diminishes capital’s share, and increases labor’s.
…Over the next decade, a sharp decline in the supply of young workers will reverse the trend: wages will tend to grow faster than GDP, and the household share of national income will begin to rise again. This will boost consumer spending and reduce the current account surplus — which has already fallen to around 5% of GDP, less than half its peak level.