The world must understand how difficult the process of rebalancing will be for China, and it should try to accommodate it. Five years ago, Chinese consumption was equal to about 40 per cent of the country's gross domestic product.
Analysts unanimously agreed that this level left China overly vulnerable to external demand. As a comparison, the share of consumption in most wealthy economies is 60 to 70 per cent of GDP. Even in other high-saving Asian countries, who are themselves overly reliant on foreign demand, domestic consumption comprises between 50 per cent and 60 per cent of GDP.
Beijing has pledged to rebalance the economy and raise the share of consumption in the mainland economy. But given the structure of the Chinese economy, in which households are indirectly taxed to support rapid production growth, this was always going to be much easier said than done.
Consumption growth on the mainland has been determined largely by the growth in household income and wealth, and these indirect taxes on household income have ensured that Chinese production growth significantly exceeded household income growth.
So perhaps it should not be a surprise that consumption during the past few years grew at 8 per cent to 9per cent a year, while GDP growth exceeded 11 to 12 per cent annually. This caused consumption as a share of GDP to drop to an astonishingly low 35 per cent.
