Sara Hsu
Sara Hsu

China is trying to shift away from traditional sources of economic growth like infrastructure investment, manufacturing and property, it is not very clear what the new sources of growth are going to be. Financial expert Maria Hsu ponders in The Diplomat what direction China´s government should take.

Sara Hsu:

What all of this means is that a shift in China’s source of growth will have to come soon, since reliance on fixed asset investment has buoyed the economy in a number of essential sectors. Rebalancing will indeed have to take place, and a policy focus on other sectors such as retail or environmental services will have to be made rapidly to maintain the current economic growth rate.

A strong policy focus will hopefully result in a knock-on effect in other sectors, while a weak policy focus will have a shallower impact. For example, a focus on growth in retail products will have a larger impact if it is accompanied by policies that promote consumption, perhaps with a consumption subsidy, or an increase in available jobs (and therefore incomes) during the urbanization process. Large-scale growth in the retail sector may also enhance consumption of food and beverages, e-commerce, and transportation/logistics, as retail products are marketed and produced. By contrast, a more limited policy that promotes consumption of retail products without ensuring the means to purchase the products would have a more short-term and limited effect.

As China’s existing sources of growth slow, new sources will become exponentially more important. How well they can replace fixed asset investment and its knock-on industries as a source of growth will depend, in turn, on how widely the impacts of new growth sources are felt. Given the large size and heterogeneity of China’s economy, the domino effect resulting from a policy shift away from focus on fixed asset investment will determine whether GDP growth can be sustained. The hope is that China’s leadership has taken into account the repercussions of the coming policy shifts and that they are sufficient to maintain its economic expansion.

More in the diplomat.

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