Rebalancing the Chinese economy made more impossible11 April, 2012, 12:49. Posted by Zarathustra
Readers who are familiar with the analysis I have had here would be familiar with the view that either rebalancing of Chinese economy has not started, or even if it has started (or will start soon), the outcome will be slow growth. As always, I tend not to emphasis on what the government will and/or can do, as I believe that ultimately the economic factors would be in play more than the choices of policy makers.
Indeed, the more I think, the more pessimistic I am on the outcome of so-called “rebalancing”. The optimistic case has always been the consumption growth will pick up very strongly, more than offsetting the slower growth in investment. Even I myself would have thought that the fact that Chinese population ageing will force consumption to go up.
But here’s the second thought.
We are dealing with consumption, which is a function of disposable income and wealth (Modigliani-type of consumption function), which should make good sense. While the fact that dependency ratio rising means that working population will have to consume more of their income (or in other words, the propensity to consume out of disposable income will increase), this will be a shrinking group within the population. Meanwhile, even though optimists may think that disposable income for those people who work will increase very dramatically because of the “labour shortage” thanks to ageing, retirees with lower disposable income stream will depend their spending on wealth. Will the consumption pattern for the whole economy improve dramatically simply because the population are getting older? On the whole, the answer might be “very unlikely”, if not downright impossible.
Again, one also has to be reminded that consumption pattern will depend of wealth as well. The higher wealth people have, the more happy they would consume. If asset markets (be them stocks or real estate) collapse (as it might), one has to really wonder why the rebalancing towards a consumption-led economy will result in more or less similar rate of economic growth and faster consumption growth, rather than much slower economic growth and less slow consumption growth.