Transcription
Hello everyone, and welcome. I am Liz Lee, fellow at Asia Society Policy Institute's Center for Ratan Analysis.
This webinar is the first installment of the year of rebalancing, a new webinar series from CCA that will examine one of the most consequential and elusive questions facing China's economy today: How to actually shift toward stronger, more sustainable domestic demand.
Um, rebalancing is hardly a new concept in China's policy lexicon, but what's new here seems to be this sense of urgency. As Beijing looks ahead to 2026, rebalancing has been elevated from a long-term aspiration to a top-tier economic priority against the backdrop of slowing growth, persistent supply-demand mismatches, intensifying trade frictions, and the long shadow cast by the property market correction and local government financing constraints.
So, the core question is not whether China should rebalance, but whether and how it can. What policy tools actually matter? How do they interact? What are the binding constraints? What trade-offs and uncertainties does rebalancing introduce, both domestically and globally?
Today's opening episode attacks these questions heads-on, and I'm delighted to be joined by Mr. Wein Shen, executive chair of PAG. Few people are better positioned to speak to this movement. We thank you so much for joining me.
>> Welcome. Thank you very much. Happy new year.
>> Happy new year to you too. So, let me start with a broad framing question. When you look at China's economy today, what is the most fundamental imbalance? Is it, you know, the relationship between supply and demand, between households and the party-state, investment and consumption, or something, you know, in the institutional architecture?
Well, before we talk about rebalancing the Chinese economy, I think we need to take a look at China's economic performance, particularly in the past three years. It has actually performed reasonably well. From 2023, the year after the pandemic, to say the end of last year, in each of the last three years, GDP growth was about 5% or more. '23 was 5.4%, and the last two years just about 5%.
But if you look at the numbers behind this growth rate, you would find that the quality of the growth is quite different. In 2023, the economy grew 5.4%. Private consumption was the major contributor to that economic growth. Total consumption contributed to 80.2% of that growth rate, whereas net exports, negative 11.4%. So, the driver of the growth was consumption.
Look at last year, and in fact 2024, and last year, private consumption contributed to about 45 to 50% of the growth. Exports, net exports, that is exports minus imports, net exports contributed to about 30% of the growth. So, the Chinese economy's growth moved from being driven by domestic consumption and domestic demand to more by net force, and that is both good and bad news.
The good news is, well, it sustained growth. The bad news is, if you rely so heavily on exports for growth, is the growth sustainable? Especially in view of the fact that the external market and environment has significantly deteriorated in the past few years with trade wars and so forth. So, the insufficiency of domestic demand becomes a major issue. And therefore, when we talk about economic balancing, I think China is urgently in need of shifting its economic growth driver away from net exports to domestic consumption.
So, that's a super insightful answer, and actually, a lot of our audience probably didn't realize that there was actually this meaningful shift, this pivot in the main driver of China's growth model. But, returning to the question of investment, export versus consumption, um, we know China relied on investment and exports as growth engines for decades, and for a long time, that model worked remarkably well for China. Um, at what point did that model begin to lose effectiveness, in your review?
So far, it still remains effective. The question is whether or not the model of driving economic growth through investments and exports is sustainable. My argument for a very long time is it's not sustainable. China has been investing about 40 to 50% of GDP year after year for a very long time. It is able to do so because China, uniquely in the world, has a very high savings rate, about 45 to 50% of GDP, roughly. Especially in a closed economy, of course, China's open economy savings rate is equal to investment rate. So, China is able to invest so much because it has the highest savings rate in the world.
But China's demography is changing. As we all know, China is aging. And when people age, they save less and they pull money out of their savings to consume. So, the trend is that the savings rate is going to drop, and therefore the investment rate is not sustainable.
Now, China has actually weaned off from dependence, over-dependence on exports since about 2006, almost 20 years ago, when exports accounted for about 36% of GDP. By the first trade war in 2018, that ratio, exports to GDP ratio, had already come down to 18%, half of the ratio of 2006. I think China was on track to shift its reliance on exports to private consumption. But that momentum somehow was halted in subsequent years, especially through the pandemic, and as we know, the export environment is getting tougher.
So, China is still doing well when it comes to exports. It's the biggest exporting country in the world. But I think eventually China will have to rely on domestic consumption, domestic demand for economic growth, as opposed to the external markets. So, I think the shift is inevitable, and China is making an effort to do so. But I think the pace is too slow. As we discussed, consumption was a major driver of economic growth two years ago, but that momentum seemed to be replaced by exports in the past two years. And for good, very good economic reasons domestically, because the slump in the property market has sapped the confidence of consumers to spend.
Fantastic. And, you know, before we turn to, uh, consumption, I want to stay on exports for a while. As you mentioned, exports have been more resilient than many expected, despite trade tensions, you know, supply chain diversifications, geopolitical pressure. Why do you think exports have held up reasonably well, uh, in China, as they have?
China today is the largest manufacturing country in the world, accounting for more than 30% of manufacturing value added globally. And the reason that China has been able to do so well in manufacturing is because it has become very efficient in making things. I recently did a study, which was published in Gavekal Dragonomics, comparing manufacturing labor productivity of China to that of the United States. Traditionally, people have measured or compared the productivity of these two countries through value-added method. But if you actually put aside the price factor and focus on physical output, I examined all the industries where you can measure productivity through physical output. I found that in those industries, China's manufacturing labor productivity was two to three times higher than that of the United States.
Why? Well, first of all, China has been added for a very long time in the past 40 years. And secondly, China has built a very robust and efficient supply chain ecosystem, which is very difficult to replace by any other country. So, both of those factors make the Chinese manufacturing extremely efficient and therefore globally competitive. If you just look at the numbers, you know, electric cars, China produces probably about two-thirds of all the electric cars in the world. Solar panels, the same. Drones, the same, right? Wind power, the same. So, China has become globally very competitive, especially manufacturing goods, because their manufacturing has become very efficient and productivity is quite high, right?
So, I, you know, there are, you know, I think we might, uh, argue whether, uh, productivity efficiency can be, um, you know, broadly extended across different sectors. But I think, I think you were absolutely right that in advanced manufacturing, China has shown a lot of strength, and its domestic, uh, ecosystem when it comes to advanced manufacturing is shining through. Um, but, you know, when it comes to the rebalancing agenda, how does that competitiveness of China's manufacturing factor into the urgency of rebalancing? Does it give rise to complacency by easing near-term GDP pressure, which might actually delay tougher domestic reforms?
I think those are two separate things because here we're talking about the supply side. I think rebalancing requires the increase of demand, that's on the demand side.
>> Got it.
>> China produces a lot of things, and the domestic market is not big enough to absorb all the supply, and that's why China exports so much.
>> Yeah.
>> Right. What China needs to do is to increase domestic demand, and that is consumption. So, China needs to increase consumption. By the way, China is not the most efficient and productive in all sectors.
I just studied the manufacturing sector. If you look at the agricultural sector, of course, America is much more efficient than China. Much smaller population for much greater output. For services, financial services, and other types of services, America is also much more efficient and productive. And of course, in terms of value added, they create much more value on a per capita basis than in China. So, I think China should continue to take advantage of its comparative advantage, and that is manufacturing efficiency on the supply side. What they need to do is to focus on how to lift domestic consumption, and therefore domestic demand, to absorb more of the output from the supply side,
>> as opposed to relying too much on the external markets, which I think long-term is not reliable. We have already seen that through trade wars and trade frictions.
>> Right. So, before we turn to, uh, boosting consumption, I also want to stay on, uh, trade tensions for a while. You recently, uh, wrote a piece for the Financial Times, which I find super interesting and insightful, as always. Um, you talk about the potential role the R&B value can play. Um, where does currency valuation or currency policy fit into China's broader rebalancing toolkit, especially in managing external trade tensions?
In that article, I argued that, uh, the Chinese currency, R&B, should be revalued because fundamentally it is undervalued. Now, that's a more recent phenomenon. I didn't argue that it has been undervalued for a long, very long time. You see, in 2021, I think the Chinese currency was traded, R&B was traded at 6.34 to one US dollar, and then at one point, earlier or even towards the latter part of last year, it was 7.34%. Why did they devalue so much? Well, it was mostly the economic hardship during the pandemic, the COVID years, followed by the bust in the property market, right? Which sapped confidence among consumers and businesses, causing, in effect, capital flight by firms and by individuals. So, there was a pressure on the value of R&B for a long time.
But towards the middle of last year, things started to change. The capital market became not only stabilized but also quite active. You know, we entered into a boom market phase. I think the property market is nearing its bottom. And therefore, if you look at the fundamentals, IMF and the World Bank put it the best: by purchasing power parity, a dollar would buy twice as much in China than in the United States. You know, China's GDP in 2024 was about $19 trillion US dollars compared to the US GDP of about $29 trillion. If you use the purchasing power parity conversion factor of about two, as estimated by the IMF, China's real GDP should be about $38 trillion US, about 30% higher than that of the United States, which just indicates to me that fundamentally R&B is undervalued, and therefore there should be fundamental forces to push it forward, push it higher, as long as the capital market is performing well and therefore attracting capital back into the Chinese economy. And that happened since the end of 2024 and through 2025. And that is the fundamental reason, >> why R&B should revalue, and we have seen in the past, uh, couple of months since I published my article, R&B has actually appreciated in value.
Fantastic. And finally, let's turn to boosting consumption, which has been discussed for a while. Um, in fact, you know, boosting consumption has been a policy goal for a few decades now, as of now. You know, it's been reiterated repeatedly across various five-year planning cycles. So, I guess the question is, why has it been so challenging to translate that intent into sustained changes in household behaviors?
Well, China, as I mentioned, was on track to increase private consumption, retail sales, for a very long time. For example, I published an article in Foreign Affairs in 2019, in which I cited a data point: in 2009, China's retail sales was about $1.8 to $1.9 trillion US, compared to about $4 trillion dollars for the United States. That is less than half that of the United States with four times the population. But by 2018, and I published that article in 2019, China's retail sales reached about $6 trillion compared to five and a half for the United States, actually higher than the United States. You see, in about 10 years, China's retail sales, which is a reflection of total consumption, went up very, very quickly, right? But that momentum was arrested in 2022 and in later years. Well, in 2023, there was a rebound after the COVID years, as I mentioned, just. But since then, the increase in private consumption has slowed significantly. To be sure, there's still an increase. It has not declined, but the increase is way below, in the past two years, the GDP growth rate.
The reason for that is very simple. Chinese household balance sheets have been impaired because of the slump in the property market, in the housing market. See, if you look at the average Chinese household balance sheet or their wealth, about 60% comes from housing, and 19% from financial instruments. Stock market, probably 6% of the total. So, when the stock market was declining, when the housing market was declining, there's little wonder that people feel the negative wealth effect and therefore they don't want to spend because they feel poorer. And that is why in the past two years, Chinese household bank deposits went up substantially. Every year in the past five years, it went up 13.4%, whereas disposable household income went up only 6%. So, twice the rate of the increase in disposable income. Such being the case, now household bank deposits stands at about $23 trillion US dollars, 15% higher than GDP. So, Chinese consumers have the ability to consume, but they're hoarding cash, not to consume, because they feel less wealthy. And I think the fundamental problem is the housing market has not completely stabilized. The drop has slowed down, but has not stabilized. I think to motivate consumers to resume consumption, the housing market will have to be fixed.
Fantastic. I mean, I think a lot of our audience probably don't realize that, uh, Chinese households actually hold exceptionally high levels of savings by, uh, global standards. So, it's not that they don't have the money, per se. Um, but as you mentioned, it's a wealth effect from the property market correction that's holding them back from actually spending it. But on to, uh, the property market. Um, you know, we've seen policies on the margin, right? Uh, reducing down payments, some relaxation of purchasing requirements in first-tier cities, but those policies don't seem to be moving the needle meaningfully at this point when it comes to property market stabilization. Um, what kind of policy actions can actually change people's expectations of the property market going into 2026? In other words, what would households need to see to behave differently and to stabilize their expectations when it comes to, uh, what they expect in terms of property market valuation?
I don't think one single policy trick or policy change will do the trick. I think it has to be a combination of measures to fundamentally shift the expectations of the consumers. First, if we look at fundamentals, there's no absolute oversupply of housing. I did an analysis back in early 2024, published in South China Morning Post, in which I, uh, checked the data and discovered that in 30 years between 1993 and 2023, China built enough housing for about 40% of its urban population in 30 years. 40% of the urban population. So, there's no absolute oversupply. There are mismatches. I'm sure you know, some localities, maybe there's more supply than demand, and there's relative oversupply because people simply don't want to buy when the market is going down, when housing prices are going down.
I have a friend who runs a factory with about 10,000 employees, and he told me that back in 2021, he was going to build 1,000 apartments for his employees, and the demand was so high that he had to sell them through a lottery to his employees. And then in 2022, the housing prices started to decline, and all the demand just disappeared, and he couldn't sell his 10,000 apartments. And that's a universal phenomenon that people buy on the rise, and people don't buy on the drop. So, that's why it is critically important to stabilize the market.
Now, if you look at the fundamentals, as I mentioned, there's no absolute oversupply. If you look at the rental yield, which is a very good measure of the demand for housing, and China's rental yield nationwide now is about 2.4%. China's government 10-year bond yield is about 1.8%. So, you would be better off renting your homes than buying government bonds. And that means, typically, that there's no substantial oversupply in the marketplace, and people don't want to buy, they rent because they're afraid the housing prices will continue to fall.
I think this is the time that the government should step in to remove all the restrictions on the demand side. You know, cities like Beijing and Shanghai still have restrictions. You and I cannot buy a property over there. You and I go to New York, Tokyo, London, you, we're free to buy anything. But in Beijing and Shanghai, without being a resident, having paid taxes, local taxes for two to three years, you're not allowed to buy properties in the city. And even if you have paid taxes for two to three years, you will have to stay there for much longer to buy properties in city centers, right? So, those restrictions should be removed. And the government has talked about buying up some properties for rental purposes, but they have not followed up very much in that particular regard. So, I think there are many things that the government can do to stabilize the housing sector, to lift the confidence, but this is also linked to the performance of the entire economy.
You see, sometimes you look at the macro numbers, and they're very different from how you feel about the economy. You know, you feel that the economy has many problems, yet the economic growth rate indicates 5% real growth rate. And the reason I think for that is the Chinese economy has potential to perform much better than what it is actually doing, and China is underperforming its potential. When Chinese government sets a target at 5%, I'm very confident they're able to achieve it because they have both monetary policy tools and fiscal policy tools to achieve whatever target that they set within reason, right? But they have been very cautious and conservative in using macroeconomic policy tools. And that, I think, is one reason why the housing market is still not recovering for lack of confidence, and that is why consumer confidence remains quite low.
Fantastic. And, uh, speaking of what the government can or will do, a lot of our audience also don't realize that China, the central government, Beijing, actually has far more fiscal resource or fiscal space than most major economies to, to actually, you know, spend. Local government's different issue. So, if the goal is to unlock consumption, where should additional fiscal resources be directed first? We mentioned the property market. What are some of the other high-priority areas?
Well, China's trick for the past few decades has been to spend on infrastructure.
>> Yeah.
>> Drew Gi, when he was prime minister or premier of the country, calculated that $1 spent on infrastructure translates into 40 cents of private consumption. So, China's fiscal policy remains very conservative. Fiscal deficit is about 3% of GDP. Now, they're increasing it to 4%. Look at the United States in COVID years, it was 11, 12%. Today, it's about 6%. And a major difference between China's budget and US budget is much of the budget for China is spent on investments. They actually produce some tangible, long-lasting things, as opposed to operating expenses. So, if you look at China's government debt, the central government debt is very modest, about 20% of GDP, compared with about 120% for the United States. If you include the so-called augmented government debt, a term used by IMF, that is to include all the local governments, that including their finance platforms, it is about 110, 120% of GDP. But the government controls the assets, state-owned companies, their net asset value is about 120, 130% of GDP. So, actually greater than the government debt. Central government's foreign debt represents 6% of China's GDP, which is almost nothing. And therefore, China has huge capacity to raise long-term debt on the fiscal side to spend on infrastructure, and in fact, there's big demand in overseas markets for R&B denominated bonds called, I think, either Panda bonds or Dim Sum bonds.
>> Yeah.
>> Which has no payment risk because it's denominated in the domestic currency. So, China has been conservative on its fiscal policy but has, as you say, a lot of space for fiscal expansion.
>> Yeah. Fantastic. And you mentioned infrastructure. Um, are there other areas when it comes to domestic reform or domestic pivot that China can spend that resources on?
Well, there are many things. Uh, for example, you can spend more on social security. Obviously, uh, there's an argument that the lack of social security drags down China's private consumption. I don't think that argument is valid. Nicholas Lardy did a study >> to show that's not the case, and I agree with him because I have never met with anyone, a pensioner, a retired person, who complains of not having enough pension income in China. And healthcare is universal, more universal than in the United States, covering more than 95% of the people. And China's life expectancy now is higher than that of the United States. China spends about 5% of its GDP on healthcare, but producing life expectancy higher than the United States, slightly, compared to American expenditure on healthcare of 17% of GDP. So, in effect, social safety net is not a constraint on private consumption, but it can always be strengthened because it's underfunded at this particular point.
So, there are many, many areas where China can spend money to make investments. And, uh, for example, Yu Ying, the economist from The Academy of Social Sciences, suggests that just the sewage system in many different cities in China would require trillion billions of dollars of investments, um, to to fix them, to modernize them. So, I, I'm not worried about, you know, they have no place to make investments. I'm not worried about waste in infrastructure investments. I think the externality created by the infrastructure buildup gives China a huge advantage in its economic growth. For example, the high-speed rail system is a very good example, right? Uh, making the entire economy much more efficient.
Fantastic insight. And actually, you know, back to Nick Lardy's point, I thought that's a super insightful, um, paper. It's not the lack of social security, not the lack of, you know, pension fund or or health insurance per se that's dragging down consumption, but I think we can agree that there's major regional differentiation and critical gaps in those areas that, uh, China can benefit from filling. Um, but, you know, I want to turn to local governments a little bit. As you know, you know, in China's bureaucratic system, local governments play a central role in the entire, uh, economic system. Um, so how do local governments' incentives shape the execution of the rebalancing agenda? Are local governments' incentives aligned or misaligned with Beijing's priorities with the national rebalancing agenda? Do you see tension there?
Yes, I agree with you absolutely that the local governments play a critical role in this economic rebalancing. For example, in the first quarter of last year, 2025, I was very surprised to find that offline retail growth was higher than online retail growth. For a couple of decades, the opposite was true. Online growth was much faster than offline growth. So, I checked into why that was the case. It turned out that subsidies for consumption, such as trade-ins for home appliances, is administered by local governments. But if they subsidize online retailers, they basically subsidize a retailer which sells nationwide because online retailers don't have boundaries across provinces, right? But offline retailers are definitely local. So, local governments provide subsidies to offline retailers. Of course, subsidies are provided directly to consumers through offline retailers and not to online retailers, creating a phenomenon that offline retailers, their sales grew faster in the first quarter than online retailers. It just shows how powerful the local governments are to tip the balance.
You studied this phenomenon of involution or oversupply in the Chinese market in your article in Foreign Affairs, and you correctly pointed out the fundamental reason for that phenomenon is the competition between local governments to lure manufacturers to their localities with subsidies because they wanted taxes and employment in their localities. And that incentive itself creates a huge problem in China, which people call involution, and in fact, it's overcapacity. Competition and cutthroat competition leading to depression of prices and therefore deflation. A quick fix for that is to shift the incentives for local governments away from rewarding them for luring manufacturing to their localities in the direction of reverting them to lure consumption to their localities. And this is already happening. I think there's a policy paper in consultation at this particular moment to allocate a greater share of consumption tax, and that is the last stage of value-added tax, to local governments to comprise about 9% of their revenue. When that is implemented, I think that will shift, you know, that marginal move would shift the incentives very strongly in favor of private consumption. So, I think through those measures, the local governments can play a very important role to rebalance away from too much effort to lure manufacturing to their localities to promoting primary consumption.
Fantastic. This has been incredibly rich and, and frankly, refreshing discussion, especially in, you know, correcting some of the misperceptions about China's economy. Thank you so much for sharing your insight, and thank you to our audience for joining us today. Uh, just a reminder, this conversation kicks off our the year of rebalancing webinar series, and in future sessions, we will dive deeper into specific dimensions of this challenge. We do hope you will join us for the rest of this webinar series. Thank you, Jen, again, and goodbye.
>> Thank you very much. Yeah.