With China leading the way, most Asian economies are experiencing rapid growth and rising income levels. Much of this growth has depended on an export-oriented development strategy, which has contributed to global economic imbalances. As China becomes an even more important player in the international economy, there is a growing need for Beijing to rebalance its growth strategy, which will also have important implications for its regional neighbors.
Carnegie hosted a panel discussion to address the sources and trajectories of these economic imbalances, with Vivek Arora of the International Monetary Fund (IMF) presenting the findings of a new book, Rebalancing Growth in Asia: Economic Dimensions for China. Min Zhu, also of the IMF and former deputy governor of the People’s Bank of China, offered introductory remarks. Nicholas Lardy of the Peterson Institute for International Economics and Carnegie’s Pieter Bottelier commented on the past and future of Chinese economic development and imbalances, and Carnegie’s Douglas H. Paal moderated the event.
Asia’s Rapid Growth and Development Strategy
Zhu and Arora each highlighted Asia’s—and especially China’s—rapid economic growth over the past three decades:
- Asia averaged 7 percent annual GDP growth from 1980-2010, resulting in an eight-fold increase in overall GDP during that time.
- China’s annual GDP growth has been even higher: its economy has grown sixteen-fold since 1980.
- Asia now accounts for one-quarter of the world’s economy and is leading the global recovery.
Both Zhu and Arora explained that Asia’s development strategy in recent decades has prioritized export-oriented growth, which depends on demand from advanced economies. While Zhu emphasized that growth in emerging markets has thus far been good for the entire world, the recent global recession and the accompanying decline in demand growth from developed nations have demonstrated the need for Asia to rebalance its growth strategies as part of a broader regional and global rebalancing effort.
Sources of Global and Domestic Imbalances
Asia’s growth strategy—including its heavy dependence on external demand and the undervaluation of the Chinese renminbi—has contributed to global and domestic imbalances, though their primary cause was the explosion in U.S. demand growth.
- Low Household Consumption: One important manifestation of these imbalances is that China’s household consumption has fallen to globally unprecedented lows (only 35 percent of GDP in 2010). Arora explained that one-third of this is attributable to a decline in spending, while two-thirds is due to an increase in private savings, which may have resulted from the dismantling of China’s social safety net—the so-called “iron rice bowl”—during the reforms of the 1990s.
- The Government’s Direct Role: The savings-investment imbalance in the Chinese government’s finances is almost as large as the savings-consumption imbalance among households, Lardy said. The Chinese government clearly plays an enormous but overlooked role in propping up high savings and low consumption.
- The Impact of Financial Repression: The combination of low interest rates and an undervalued exchange rate has led consumers to save even more than normal in order to compensate for the lost income they previously would have gained from interest, added Lardy.
- Devaluation of the Renminbi: Although Arora and Lardy highlighted the part that the depreciation of the RMB played in creating global imbalances, Bottelier questioned whether the devaluation of the RMB originally contributed to the development of global imbalances or if it merely exacerbated them once they emerged.
- Excessive U.S. Demand Growth: The explosion in demand in the United States—which arose from loose monetary policy, the George W. Bush tax cuts, and massive credit expansion—was the single greatest source of the imbalances that led to the recession, Bottelier said.
- Chinese Liquidity from Reforms in the 1990s: Bottelier added that the reforms instituted by China’s Premier Zhu Rongji in the late 1990s, including the privatization of the urban housing sector, injected massive amounts of liquidity into the Chinese economy, enabling high levels of investment.
Prospects for Economic Rebalancing
Different economies within Asia are facing different rebalancing challenges.
- Necessary Reforms: Arora contended that the most effective rebalancing strategies will be ones that require coordination among Asian markets. He highlighted three major reforms that Asian economies will need to implement:
- Increase Investment in Southeast Asian Countries: Many countries in Southeast Asia, including the Philippines and Indonesia, will need to increase their levels of investment. This should involve attention to improving infrastructure, which could result in significant growth.
- Strengthen Asia’s Financial Institutions: Asian economies will need to strengthen their financial institutions, including equity and bond markets. This will provide alternative financing methods that will facilitate a much-needed reduction in Asia’s high corporate savings rates. Along similar lines, Japan should develop its relatively weak venture capital sector.
- Boost China’s Household Consumption: Arora highlighted the need for China to increase its domestic household consumption. To do so, China should expand its social safety net and encourage growth in the services industries, in addition to broader macroeconomic reforms.
- Prioritize Supply-Side Growth: Zhu acknowledged that consumption will need to increase within China, and wealth redistribution may play a role in encouraging that. However, he emphasized that supply-side growth policies will be key to increasing the amount that people earn and thus the amount they are able to spend.
- Reduce Over-Investment: Bottelier emphasized that efforts at economic rebalancing should be directed toward reducing China’s excessive investment rather than increasing domestic consumption, as Chinese consumption has already been growing rapidly.
- The Potential for Automatic Rebalancing: Lardy suggested that China’s economy may automatically rebalance itself, especially if wages grow at higher-than-expected rates. Bottelier identified seven other developments that may signify the coming of a gradual, automatic rebalancing of the Chinese and global economies:
- The high savings rate mostly reflects factors that will not recur, such as Zhu Rongji’s reforms.
- Consumer finance (including housing mortgages) has already exploded.
- Increases in government spending on health and education will boost consumer spending and reduce precautionary savings.
- Employment growth in services is already higher than employment in manufacturing, a trend that is likely to continue.
- The current account surplus has already decreased significantly and the 2011 trade surplus is expected to be lower than in 2010.
- Although the nominal RMB–U.S. dollar exchange rate is increasing slowly, the real exchange rate is appreciating rapidly (at an annualized rate of 10 percent).
- The share of processing trade is likely to decline as China seeks to increase the domestic value-added in its exports, which will in turn reduce the trade surplus.