From Internal Imbalances to Global Imbalances: A Survey on the Causes of China

There is a broad consensus that China’s export- and investment-led growth model is unsustainable and therefore needs to become more balanced. In the public debate, Chinese exchange rate interventions are mostly made (solely) responsible for this. But it is unclear whether and how much the Renminbi is undervalued, and if an exchange rate appreciation helps to reduce China’s current account surplus significantly. This survey reviews the international literature on China’s export-oriented growth model. Structural internal imbalances in the Chinese economy, resulting in an extremely low consumption-to-GDP share by historical and international standards play hereby a central role. Related to this are: 1.) the drop in household and wage income as a share of GDP and low employment growth, and its impact on consumption demand; 2.) the increase in income uncertainty and inequality, and its impact on household savings; and 3.) the role of government spending, i.e. high and increasing public surpluses. The central policy challenge is therefore to increase household incomes, and to reduce income inequality and uncertainty.