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China's Great Rebalancing Act

Authors: Nicholas Consonery, Analyst, Eurasia Group, Evan A. Feigenbaum, Damien Ma, Analyst, Eurasia Group, Michal Meidan, Analyst, Eurasia Group, and Henry Hoyle, Researcher, Eurasia Groups
August 17, 2011
Eurasia Group

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Introduction

For decades, China's blistering growth has depended  on exports and investment. The country has become the world's workshop and lifted millions out  of dire poverty. And for the first time in nearly two centuries, China has returned to a position of global power and influence. But this growth model is no longer sustainable  and China's savvy leaders know it. They are committed  to rebalancing the country's economy because their capital-intensive, export-oriented approach is delivering  diminishing returns and threatens to become a major political vulnerability for the government.

Why is China's growth model delivering diminishing returns? The global economic crisis provided clear evidence that China's export-driven economy is vulnerable  to dips in demand in the rest of the world. Meanwhile,  its dependence on investment has introduced distortions  and imbalances into the Chinese economy. China's monstrous $586 billion stimulus package in  2009 staved off severe hardship and effectively reinvigorated the economy. But most Chinese policymakers agree that rapid growth now looks less desirable and, more to the point, cannot be sustained under the current approach. Some policy advisers and economists have also warned that China could become trapped in a “lost  decade” similar to Japan's if it does not change course.

The 12th Five-Year Plan (FYP), which runs from 2011- 2015, is their strategic blueprint for doing so. Such plans  are a legacy of the 1950s, when China's socialist economy was built around detailed plans that touched every aspect  of economic life. But the 12th FYP aims to alter China's  macroeconomic landscape in far-reaching ways, with effects that are likely to be felt for a decade to come. Eurasia Group does believe that Beijing will achieve some of its goals. But ultimately, the country's leaders lack the political stomach and sense of the moment to  implement a comprehensive and ambitious rebalancing agenda. They have correctly diagnosed many of China's underlying economic challenges and have, at least on paper, prescribed many of the needed remedies. Yet, as innately conservative technocrats, their inclination  to put off the toughest decisions about China's political economy means that Beijing will confront even starker choices down the road.

Failure to implement key portions of the rebalancing  agenda will jeopardize China's economic trajectory. And  over the longer term, such failures could also threaten China's political stability.

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