Rebalancing of demand in China – illustrating possible effects with an input-output analysis

Abstract

As it gets increasingly difficult for investors to find opportunities for productive investment, China’s traditional investment-led growth model has lost steam. China now faces a rebalancing of domestic demand toward increased consumption and a paradigm of lower growth. Given that China is already the second-largest economy in the world, this shift will inevitably put adjustment pressures on the global economy. To illustrate these adjustment pressures, we consider global input-output tables. Our analysis suggests that China’s development poses important adjustment pressures for the global economy in both sectoral and regional terms. As this shift is expected to take time, however, other countries should have time themselves to deal with the shift. There are many risks that could thwart a smooth rebalancing, of course, and they should not be underestimated. With the help of South Korean and Japanese benchmarks, we also illustrate how the Chinese economy could experience quite different development scenarios, depending on the path chosen.