China's Economy in Transition: From External to Domestic Rebalancing: from external to internal rebalancing

China’s current account surplus has declined to nearly a third of its pre-crisis peak. While this is a major reduction in China’s external imbalance, it has not been accompanied by a decisive shift toward consumption-based growth. Instead, the compression in the external surplus has been accomplished through investment rising even higher as a share of the national economy. The increasing reliance on investment as the main driver of China’s growth raises questions about how durable the compression in the external surplus will be and whether the current growth model, which has had unprecedented success in lifting about 500 million people out of poverty over the last three decades, is sustainable. This volume will study various aspects of the rebalancing underway in China and highlight policy lessons for achieving a stable, sustainable, and inclusive transformation of the growth model. Cover 1 Contents 4 Acknowledgments 6 Contributors 8 Abbreviations 12 Introduction and Overview 14 PART I: A SHIFT IN FOCUS: FROM EXTERNAL TO INTERNAL IMBALANCES 20 1 An End to China’s Imbalances? 22 2 Investment in China: Too Much of a Good Thing? 44 3 China’s Rapid Investment, Potential Output, and Output Gap 60 4 Determinants of Corporate Investment in China: Evidence from Cross-Country Firm-Level Data 70 5 Interest Rates, Targets, and Household Saving in Urban China 94 PART II: IMPLICATIONS FOR CHINA’S TRADING PARTNERS 118 6 Implications for Asia from Rebalancing in China 120 7 Investment-Led Growth in China: Global Spillovers 128 8 The Spillover Effects of a Downturn in China’s Real Estate Investment 150 PART III: POLICY IMPLICATIONS 168 9 Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? 170 10 How Pro-Poor and Inclusive Is China’s Growth? A Cross-Country Perspective 194 11 De-Monopolization toward Long-Term Prosperity in China 214 12 Transforming China: Insights from the Japanese Experience of the 1980s 230 13 The Next Big Bang: A Road Map for Financial Reform in China 256 14 Summation 280 Index 284 A 284 B 284 C 284 D 285 E 285 F 286 G 286 H 287 I 287 J 288 K 288 L 289 M 289 N 290 O 290 P 290 R 290 S 291 T 291 U 292 V 292 W 292 X 292 Z 292 China's current account surplus has declined to around one-quarter the peak reached before the global financial crisis. While this is a major reduction in China's external imbalance, it has not been accompanied by a decisive shift toward consumption-based growth. Instead, the compression in its external surplus has been accomplished through increasing fixed investment so that it is now an even higher share of China's national economy. This increasing reliance on fixed investment as the main driver of China's growth raises questions about the durability of the compression in the external surplus and the sustainability of the current growth model that has had unprecedented success in lifting about 500 million people out of poverty over the last three decades. This volume examines various aspects of the rebalancing process underway in China, highlighting policy lessons for achieving stable, sustainable, and inclusive growth. China's current account surplus has declined to around a quarter of its pre-crisis peak. While this is a major reduction in China's external imbalance, it has not been accompanied by a decisive shift toward consumption based growth. Instead, the compression in the external surplus has been accomplished through fixed investment rising even higher as a share of the national economy. The heavy reliance on investment raises questions about how durable the compression in the external surplus will be and whether the current growth model, which has had unprecedented success in lifting about 500 million people out of poverty over the last three decades, is sustainable. This volume looks at various aspects of the rebalancing under way in China and highlights policy lessons for achieving a stable, sustainable, and inclusive transformation of the growth model. Chinaâ??s current account surplus has declined to around one-quarter the peak reached before the global financial crisis. While this is a major reduction in Chinaâ??s external imbalance, it has not been accompanied by a decisive shift toward consumption-based growth. Instead, the compression in its external surplus has been accomplished through increasing fixed investment so that it is now an even higher share of Chinaâ??s national economy. This increasing reliance on fixed investment as the main driver of Chinaâ??s growth raises questions about the durability of the compression in the externa