Summary

Over the past 30 years, demographic changes, economic reforms and WTO membership, individually or in combination, have helped China achieve a long period of unfettered economic growth. However, as the“dividends”of these structural factors began to fade, China's existing growth cycle is likely to experience some fundamental changes going forward. As this happens, the economic doctrines that had provided useful insights on how the economy worked in the past will become less relevant. Thus the main objective of this book is to develop a new framework for analysing the Chinese economy. Based on this framework, we examine in various chapters some important economic issues and challenges. Hopefully, we could help readers identify the path of China's economic rebalancing.

This book focuses on two main analytical streams-institutional reforms and demographic changes-and draws three main conclusions. First, trend growth in China is expected to moderate from the current high pace. The slowdown is mainly resulting from a number of structural changes, including the fading demographic dividend, a decline in surplus rural labour, and the decreasing returns of institutional and structural reforms, especially WTO membership. In addition, the elevated land and property prices will weigh on the performance of the real economy.

Second, the structural imbalance in China is complex and multifaceted, but at the root of the problem is the growing income inequality. The growing income gap over the past decade suppressed the aggregate consumption ratio whilst pushing up savings and investment demand. Weak consumption/strong investment demand in turn led to a strong industrial sector with the servicing sector being lagged behind. Furthermore, the heavy presence of industrial sector brought along environmental problems as well as increased demand on natural resources. In general, the growing income inequality can be attributed to demographic changes and policy distortions. On the one hand, the migration of large number of surplus rural labourers to the cities during the past decade suppressed wages. On the other hand, the existence of considerable monopoly power in certain industries, a distortionary fiscal structure（including over-reliance on turnover taxes and low tax on wealth and, the government spending inadequately on public services and social benefits）, financial repression（through deposit rate and capital account restrictions）, and fast-rising property prices means that a large proportion of the income growth being distributed to a small group of people.

Third, the combination of large amounts of private savings, a real estate bubble and strong credit expansion will pose the biggest macroeconomic risk in the next 5 to 10 years. The high savings rate has supported strong investment demand and entailed relatively low inflation. Strong credit expansion and sharp rising property prices both have very strong pro-cyclical characteristics. International experience suggests that the bigger a property bubble and the larger the credit（including shadow-bank lending）expansion a country inherited during the expansion phase of a credit cycle, the more painful will be the adjustment process when the cycle turns.

Economic transition should strike a balance between equality and efficiency. This involves the relationship between the government and market, young and old generation, financial sector and real economy, demand and supply. As the difference in people's endowment continues to widen, the issue of equality will attract greater social attention. In addressing the balance between the government and the market, it is essential to correct simultaneously the“overshooting”and“undershooting”problems, pushing through fiscal reforms and relaxing the restrictive family planning policies. In implementing financial regulatory reforms, especially in liberalising interest rates, it is important to put emphasis on reining in fast-rising property prices, enhancing the regulations on the shadow banking sector and keeping credit expansion under control.