China’s rapid economic growth may be coming to an end as it faces obstacles such as underconsumption, according to economic commentator Martin Wolf. Excessive propensities to save can lead to chronically deficient demand, which requires expansionary monetary and fiscal policies to offset. However, these solutions can generate other problems. China’s gross national savings peaked at 52% of GDP in 2008 and remained at 44% in 2019, indicating a reliance on investment, particularly in property. Despite the rise in investment, China’s growth rate has fallen, and the debt ratio has soared, adding financial fragility to the economy.
Wolf suggests that China’s unbalanced economy may be halted by a property crash. UBS predicts that new property starts in July were 65% below their level in the second half of 2020, suggesting enduring weakness in demand. The danger lies in chronically weak demand rather than a financial crisis, as China is a creditor country with debts in its own currency. To address weak demand, higher public and private consumption is needed, which would require higher spending by the central government and a shift in income distribution towards households. However, Wolf believes that these drastic steps are unlikely to be taken by the timid central government.
In order to achieve sustainable growth, China needs to shift towards a consumer-led economy. Household consumption currently only accounts for around 40% of GDP, with household disposable incomes being only 60% of GDP. The remainder goes to governmental entities, state-owned enterprises, and private corporates, resulting in a savings rate that is far greater than can be productively used. To generate higher consumption and domestic demand, income and assets need to be redistributed towards ordinary people, along with a change in public spending priorities and early debt restructuring. Whether the Chinese government will take the necessary revolutionary steps to create a more balanced consumer-led economy remains uncertain.