This makes the continuation of future growth highly uncertain, as the growth pattern of over-reliance on investment and export-driven production is not self-sustaining. Heavy investment can create demand in the short run; but a faster expansion of production capacity over consumption growth will result in more serious overcapacity problems in the longer term and aggravate the supply–demand imbalance. China’s rapidly expanding net export growth will also eventually face demand constraints in the world markets and awaken trade protectionism in importing countries, making the huge trade surplus unsustainable. Therefore, the fundamental driving force for long-term growth will be healthy patterns of domestic consumption growth.

To judge the seriousness of China’s structural imbalance problem, and how this might affect future growth patterns, three questions should be considered.

First, are China’s official statistics for total consumption and the consumption ratio reliable? A 2010 study found that the official statistics for both the household income and consumption expenditure of high-income residents are under-reported, with household income far more under-reported than consumption. The household consumption data in GDP statistics are already significantly greater than those in household income statistics. For example, total household consumption in 2008, according to the former statistics, totalled RMB11.06 trillion (US$1.59 trillion), which is 16.9 per cent higher than the RMB9.46 trillion recorded in the latter statistics. Similarly, the former statistics were again higher, at 11.5 per cent, than the latter in 2010. If we believe that the household consumption data in GDP statistics are still understated (which is quite possible), then GDP data also need an upward adjustment, and likely to an even greater extent. As a result, the consumption ratio to GDP may incur a downward, rather than upward, adjustment.

Second, is rebalancing underway? Wages and famers’ income have grown quite quickly in recent years; in 2010, urban and rural income per capita grew by 7.8 per cent and 10.9 per cent, respectively, in real terms. But their weighted average is still below the per capita GDP growth rate of 9.9 per cent. And consumption growth for both urban and rural households is slower than their income growth. In 2011, urban and rural income per capita grew by 8.4 per cent and 11.4 per cent respectively, and their weighted average exceeded the per capita GDP growth rate of around 8.7 per cent for the first time in many years. But this was partially a result of short-term issues. In particular, farmers’ income benefited from rapid price increases for agricultural products — which occurred much faster than increases in the consumer price index.

According to China’s National Bureau of Statistics, final consumption represented 51.6 per cent of total GDP growth in 2011. To adopt this figure and the 9.2 per cent GDP growth rate, the consumption ratio to GDP in 2011 should be between 47.7 per cent and 47.8 per cent, which is only slightly higher than the 2010 figure of 47.4 per cent. But it is still too early to treat this as signalling a trend toward rebalancing. And although net exports dropped to below 3 per cent of GDP in 2011, this was mainly a result of the yuan’s appreciation and the weak US and European markets, rather than a rebalancing of China’s domestic economic structure to reduce the market pressure on exports. So although there is some evidence of structural improvement, resulting from both changes in the market supply–demand situation and the effort made in recent years to improve public services, social security systems and transfer payments, it is still hard to conclude that rebalancing is already underway.

Third, what caused China’s economic imbalance in the first place? It resulted mainly from significant income inequality, the undesired management and use of public resources, the improper distribution of monopolistic profits and gains from natural resources, and capital and land markets. These are mostly institutional problems. It is insufficient to solve them by simply relying on increasing wages and government transfer payments. To rebalance China’s economy, it will be necessary to carry out fundamental reforms to the current fiscal and taxation systems; the monopolistic sectors; the financial, land and capital markets; and the government administration system. China’s social security system and public service systems must also form a part of this review. Without many years of substantial and unremitting institutional reforms, the problem of economic imbalance will not be solved.

Wang Xiaolu is Deputy Director and Senior Fellow at the National Economic Research Institute, China Reform Foundation, Beijing.