Very good Rhodium piece on the challenges facing the Chinese economy. The good news, Rhodium notes, is that there is pretty much a consensus among economic policy advisors (although, I would add, not necessarily among policymakers) on the urgent need to rebalance the economy away from investment and towards consumption.
The bad news is that there is no consensus on how the costs of this rebalancing are to be allocated within the economy – nor, I would also add, even an acknowledgement that this is the key issue in rebalancing. With, broadly speaking, three sectors in the economy, the transfers needed to raise consumption must be allocated either within the household sector or from the business or government sectors.
In the first case, the transfers would come from rich and middle class households (e.g. through higher income taxes, property taxes, or cuts in services) and go to migrant workers and the rural poor. But with the middle class already suffering from job uncertainty and the property decline, this might be socially and politically more disruptive than Beijing would want to consider. What is more, the main reason for low consumption in China is not income inequality within households but rather the low overall household share of income, so even if Beijing were willing to implement such policies, they wouldn't solve the deeper underlying problem.
Another way to raise the consumption share involves transfers from businesses to households (e.g. raise interest rates, revalue the currency, reduce subsidies to businesses, close down the weakest players in sectors with low profitability and excess capacity, cut spending on logistical infrastructure). The problem here is that after years of operating on massive direct and indirect subsidies, many Chinese manufacturers are incredibly competitive but not terrible efficient (in the sense of being able to create more economic value than they absorb directly and indirectly through subsidies and transfers).
Without these transfers, in other words, an awful lot of businesses would be forced either to cut capacity sharply or to close. If this were to happen quickly, it would be very disruptive for employment and the overall economy, but if this were to happen over at least a decade or more of careful restructuring, it would require a lot more foreign forbearance on trade and a lot more debt.
The third way to raise the consumption share of GDP is to allocate the costs to the central or local governments. The right way to do this, as Rhodium notes, might involve directly or indirectly transferring ownership of businesses and assets from local governments to households.
The wrong way to do this would be to increase China's debt burden even further. Unfortunately even though China has the second highest debt burden in the world (after Japan's) and the fastest-growing debt burden in history, increasing debt further would be politically easier in the short term than transferring government assets to households. The key point here is that local governments should not liquidate assets to fund additional spending, as they seem to be doing now, but rather either to pay down debt or to fund transfers to households. But this almost certainly involves a significant change in the distribution of income within China and, with it, a potentially disruptive redistribution of power.
So if it is so hard to rebalance, why not ignore rebalancing and just double down on the existing model? The problem here is that while certain aspects of the Chinese economy may seem in good shape, in fact the overall economy is struggling, and it is only massive increases in debt every year that allow Beijing to continue to achieve its growth targets. But as happened to every other country that followed this model, debt is always what causes the ultimate unraveling, and it is much better for China to begin the difficult adjustment while it still has fiscal space than to be forced into adjustment when it no longer has fiscal space.
JOHN MEARSHEIMER: “The United States has lost this war. It can't figure out how to solve this war. And it's going to have enormously negative consequences for all of you. You should understand that. We are in deep trouble in Iran..”