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China’s Macro Disconnect

China has been highly successful in transforming the industrial structure of its economy from manufacturing to services, but it has made far less progress in boosting private consumption. The country now has no choice but to address the causes of households' high precautionary saving and low discretionary spending.

NEW HAVEN – Structural change and rebalancing are formidable undertakings for any economy. China has been focused on these objectives for five years – seeking to transform a powerful yet unbalanced growth model based largely on exports and investment into one driven increasingly by its consumers. Success is essential if China is to avoid the dreaded “middle-income trap” – the economic slowdown that most fast-growing developing economies experience when they reach income thresholds comparable to that of China today.

The results have been mixed. China has been highly successful in its initial efforts to shift the industrial structure of its economy from manufacturing to services, which have long been viewed as the foundation of modern consumer societies. But it has made far less progress in boosting private consumption. China now has no choice but to address this disconnect head on.

The performance of China’s services sector has been especially impressive in recent years, with its share of GDP increasing from 44% in 2010 to 51.6% in the first three quarters of 2015, according to official statistics. That is nearly double the four-percentage-point increase that was initially envisioned in the 12th Five-Year Plan, which is about to come to an end.

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