Michael Pettis in RCW:

a small but rising number of Chinese economists are beginning to predict sharply lower annual growth rates of 6% to 7% over the next few years. But the arithmetic of adjustment suggests growth is likely to be even lower, perhaps half that level…

Can China rebalance away from investment and toward domestic consumption as the main engine of growth? Yes, but with great difficulty. Chinese households consume only about 35% of GDP, not much above half the global average and far less than any other country. Such a large domestic imbalance has no historical precedent…policy makers have said that they will try to raise consumption to 50% of GDP…

achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%.

Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates. These sharply reduce borrowing costs for the state-owned companies that funnel this easy money into mega-investments…This cheap borrowing comes at the expense of depositors. Low yields on deposits force them to sacrifice consumption, to save more…

Even if consumption manages to keep growing at the same rate it has during the past decade, when Chinese and global conditions were buoyant and debt levels much lower, China’s growth must slow to 3-4% to achieve rebalancing. This is the impact, in other words, of the required reduction in investment, which will have to be sudden and sharp.

In the worst-case scenario, consumption growth slows down to less than what it was last decade-perhaps because of slower GDP growth — making rebalancing even harder. The only way to speed up the process would be for the government to recapitalize the banks with state assets.

IBD said that China’s GDP numbers weren’t all that reliable to begin with. We’re inclined to think that China won’t be able to address its problems of inflation and slowing growth without more pain than is commonly forecast today.

This entry was posted on Monday, August 15th, 2011 at 11:42 am and is filed under business, China, Democrats, General, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.