Decisions taken in 2011 will set China's growth path for next few years

This year, Beijing will face the task of keeping gross domestic product growth rates high - probably about 9 per cent - while trying to reduce the economy's dependence on increasing investment. This will not be easy.

To see why, consider the engines of economic growth. China, like nearly every other country, relies on three sources of economic growth - domestic household consumption, the trade surplus and domestic investment. Of the three, household consumption constitutes a lower share of GDP in China than in any other country. This low share is at the heart of China's economic imbalance. It is now widely recognised that raising it sharply is key to the long-term sustainability of Chinese growth.

To compensate for low consumption, China is heavily reliant on the other two sources of growth: a rising trade surplus and rising investment.

The level of investment is the highest ever and is increasingly viewed as a serious problem because of the risk that misallocated investment will lead to growth today that will be more than fully reversed in the future. China's trade surplus is already the highest ever recorded as a share of global GDP and is much too high as a share of domestic GDP for such a large economy.

In an ideal world, for the next five to 10 years, Chinese household consumption would grow annually by 10-11 per cent or more (it has grown 6 to 9 per cent a year over the past decade) as part of a rebalancing of the economy. In fact, Beijing has said many times over the past few years, including in its latest five-year plan, that accelerating household consumption growth is a priority.

But China's growth model is heavily dependent on the factors that automatically repress growth in household income and, with it, household consumption. Reversing these factors - by raising wages, interest rates and the value of the yuan - can only be done slowly if Beijing wants to avoid a short-term rise in financial distress and joblessness.

If there cannot be a surge in consumption this year, then what about a surge in the country's trade surplus?