'Rebalancing' Aggregate Demand

It is generally agreed that China’s economic growth is now no longer being fuelled by net exports of goods and services to the extent that it was in the few years prior to the 2008 great financial crisis, but gross capital formation has been an even greater contributor to such growth than before. Perhaps what was eventually inevitable has now struck in the form of immense overcapacity and non-performing loans. Overinvestment in commercial and high-end residential property, steel, cement and automobile capacities and in other manufacturing sub-sectors is starkly visible, especially in the new uninhabited “ghost towns.” For economists, the fact that producer prices, especially the prices of manufactured goods in terms of their valuation at the time of despatch from the factories, have fallen month after month over the last three years, drives home the point. The question one needs to ask is: Where is this very significant overinvestment leading to and what needs to be done?

In terms of the components of aggregate demand, what economic observers have been advocating for quite some time is that China should “rebalance” its over-reliance on net exports and investment in favour of consumption. The fact that the share of net exports in China’s gross domestic product (GDP) has come down quite significantly is, of course, the result of the external demand constraint, especially from the world’s two largest markets, the United States and Western Europe. But, regarding investment, one needs to recall that China was the most adept of the world’s economies in bringing itself out of the slump that followed the great financial crisis of 2008. The Chinese government launched a massive $585 billion stimulus plan and urged the state-owned banks to be liberal in dishing out new loans, the two leading to a massive increase in investment in the years that followed, making up for the decline in the share of net exports of goods and services in GDP. The share of household consumption expenditure in GDP has fallen dramatically from something like 44% in 2002 to 34% in 2013.