Turnbull make sense on China

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Well, one pollie has a brain anyway. From Malcolm Turnbull today:

Continuity, rather than change, is the order of the day in Washington and Beijing. Barack Obama has been convincingly re-elected and while his party has picked up seats in both houses of Congress, the Republican opposition remains in the majority in the House of Representatives.

In Beijing there is a new leadership, but both Xi Jinping and Li Keqiang have been members of the consensus-driven Politburo Standing Committee for five years and for years everyone has known that they are destined to be the next President and Premier respectively.

In China, the key issue, as recognised in the current and previous five-year plan, is that household consumption is too low and the economy needs to be rebalanced away from the capital-intensive investment and export-driven growth trajectory of the past 15 years to a more sustainable path less dependent on distorted factor markets – that is, artificially low prices for inputs used by producers such as land, energy, water, the right to pollute and (most importantly) capital.

Until very recently Chinese households received negative real interest rates for their deposits, effecting a substantial transfer of wealth from households to business – mostly state-owned enterprises. This financial repression coupled with a low exchange rate has meant household consumption has grown more slowly than overall gross domestic product.

For China’s growth to become less biased towards investment and exports these distortions need to be gradually wound back – but this will create intense adjustment pressures for enterprises already facing higher wage bills as the once-limitless supply of cheap labour from rural areas starts to run down.

Rebalancing requires that Chinese household consumption begins growing as a share of GDP from its current 37 per cent – one of the lowest ratios in the world (and about half the level of household spending as a proportion of GDP in the US).

 Macrobated?
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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.