China’s Macro Disconnect

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.

The gains have been particularly strong in the distribution sectors – wholesale and retail trade – as well as in finance and real estate. And China’s shift to services has only just begun. It should broaden into IT services, healthcare, domestic transportation, and hospitality and leisure, as the sector as a whole climbs toward a 60-65% share of GDP over the next decade.