China’s Rebalancing Act - A Balanced China is a Slower China

We used the FT video below during our recent CPD days on China and it is an excellent introduction to a core issue for students looking at the opportunities and threats for businesses looking to trade with and in China.

China's stunning record of economic growth has largely been driven by investment and exports. In particular, following the global economic slowdown in 2007-10, China responded by accelerating investment in infrastructure projects and the programme of mass urbanisation which has created the largest human migration in history.

A consequence of this approach is that China's economic growth can be said to have been "unbalanced", with the economy over-reliant on investment spending which cannot be sustained indefinitely.

China is now looking to "rebalance". That's a key term that I fully expect to feature in strong essays written by AQA BUSS4 students in 2014.

What does rebalancing mean? It is all to do with the proportion of economic activity generated by each main sector of an economy.

China’s leaders want to reduce the economy’s reliance on investment, while expanding household consumption, which now accounts for around 35 percent of the Chinese economy, about one-half of the 65-70 percent rate typical of developed economies such as the US, UK and Germany.

In fact in China, consumption as a share of GDP has declined steadily over the past decade to its current levels of 35 percent — the lowest of any major economy — while its investment share rose to above 45 percent, correspondingly the highest.

In a recent BBC article, Linda Yueh explained the objectives of rebalancing further, drawing a neat comparison with what the UK government is trying to do with its own rebalancing act:

To quote Linda:

"For the UK, the government wants to re-balance the economy towards manufacturing and exporting more overseas, while relying less on, say, financial services given the banking bust of a few years ago. Manufacturing only accounts for around 11% of total valued added of what's produced in Britain, while the service sector accounts for over three-quarters of the economy.

For China, it's the opposite. It wants to re-balance its economy away from too much investment and towards developing a more diversified service sector to provide for its burgeoning middle class. China is worried about its high levels of capital spending, which has produced so-called ghost cities, and wants its companies to invest overseas instead"

Linda Yueh explains rebalancing further in this superb short BBC video:

A key point for students to build into their analysis and evaluation is that successful rebalancing by China will have implications for its future rate of economic growth. As consumption rises as a proportion of GDP then the overall rate of economic growth is likely to slow. That will be good news for businesses outside China wanting to take their share of demand generated by the growing numbers of Chinese consumers. However, the flip-side is less opportunity, perhaps, for businesses who have benefitted from the massive infrastructure investment of the last couple of decades.

As the FT's Simon Rabinovitch points out at the end of the video:

"An unbalanced China is a fast China; a rebalancing China will have to be a slower China".

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