TOKYO – As the Third Plenum of the 18th Central Committee of the Chinese Communist Party convenes in Beijing, China stands at a crossroads. Its recent growth record is stupendous; no country in history can match it. But China’s economic imbalances are also stupendous. The country has sustained its output growth by investing fully one-half of GDP, though no country can productively invest more than a third of national income for an extended period. Household consumption accounts for only one-third of GDP, compared to two-thirds in a normal economy.
Associated with this low level of consumption is widening inequality – between the countryside and the cities, and between the political elites and the masses. University graduates with rising aspirations cannot find the office jobs that they seek and will not accept the factory jobs that they are offered. Social unrest, whether expressed in blogs or spontaneous demonstrations, is mounting.
China’s leaders understand all of this. They acknowledge the need to rebalance the economy from investment to consumption, and they recognize that this means developing the service sector, where good white-collar jobs will be found. They also appreciate the need to build a social safety net and strengthen rural property rights.
But Chinese officials worry that the shift from investment to consumption, and from manufacturing to services, will mean slower growth. Less investment will mean less capital deepening. Expanding the service sector, where productivity is low, will hold back aggregate output. And if growth decelerates further – the annual rate has already dropped from 10% to 7.5% – social unrest may increase.