Reviving China’s Rebalancing

BEIJING – China is at a crossroads. After experiencing three decades of unprecedentedly rapid GDP growth, the country weathered the global economic crisis exceptionally well. But it sustains considerable economic imbalances, which are undermining its ability to achieve high-income status. The question is whether China’s leaders – preoccupied with challenges like financial instability stemming from risky shadow-banking activities and a heavy burden of local-government debt – have the policy space to put the economy on a sounder footing.

In the aftermath of the global economic crisis, China appeared to be on track to complete such a rebalancing. Its current-account surplus fell from more than 10% of GDP in 2007 to 2.6% in 2012, and it ran a large capital-account deficit for the first time since 1998. Moreover, China added only $98.7 billion to its foreign-exchange reserves in 2012, compared to an average annual increase of more than $435 billion from 2007 to 2011. That meant diminishing upward pressure on the renminbi’s exchange rate.