Political constraints will obstruct China's effort to rebalance its economy, Eurasia Group argues in new report on China 

17 August 2011

NEW YORK-Since launching economic reforms in 1978, China's blistering growth has been predicated on two pillars-exports and investment. The country has become the world's workshop and lifted millions out of dire poverty, returning to a position of global power and influence for the first time in nearly two centuries.

But this growth model is no longer sustainable, according to Eurasia Group's China team in a comprehensive new report entitled China's Great Rebalancing Act, and China's savvy leaders know it. Still, their capacity to meaningfully rebalance the economy will run into significant obstacles in coming years. This report examines the economic and social maladies that now confront Chinese leaders and the solutions they have prescribed to remedy them in the 12th Five Year Plan, a strategic blueprint for changing the country's economic course. Among the major conclusions of the report are these:

* China's leaders will put off the toughest decisions about how-and how quickly-to rebalance the country's economy. That means Beijing will confront starker choices down the road.
* Wage hikes and new social spending will enable Chinese households to save less and spend more. But Beijing will fail to introduce bold reforms that meaningfully redistribute wealth from corporations and government to households.
* China will restructure much of its energy industry and change its energy profile. But Beijing will probably fail to meaningfully constrain energy consumption. 
* Rapid urbanization will generate new consumer demand.
* Within China, government support for strategic industries will create virtuous investment cycles and job growth. But globally, these same policies will threaten the competitiveness of foreign firms.
* Financial reform will falter because of the government's continued reliance on banks as a tool of industrial policy.
* China will create a more integrated economy as some economic activity moves from the coast to central and western China.
* There will be unconventional opportunities for corporate partnership among Chinese and foreign firms that have little trust and may ultimately compete-for example, through collaborative research and development.
* A powerful nexus of Chinese corporate and state interests will work to stymie the creation of a more competitive private sector.

"The bottom line is this," notes Evan Feigenbaum, who heads the firm's Asia practice group, "China's leaders are committed to altering their country's macroeconomic landscape. But, the country's political economy will not change as fundamentally as many in China and abroad hope. And the next decade is likely to be more fraught than conventional wisdom suspects." 

Eurasia Group's report is a must-read for any investor, company, or analyst seeking to understand the forces and dynamics that are shaping the future of China.

Please CLICK HERE for the complete report.

Alexsandra Lloyd, Director, Communications: +1 (646) 291-4036 or [email protected]

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Eurasia Group is the world's leading global political risk research and consulting firm. By providing information and insight on how political developments move markets, we help clients anticipate and respond to instability and opportunities everywhere they do business. Founded in 1998, the firm's name reveals its early focus on the Soviet Union and Eastern Europe, but today our research platform is global. Our analysts monitor political, economic, social, and security developments in Africa, Asia, Eurasia, Europe, Latin America, the Middle East, and North America. Headquartered in New York, we have offices in Washington, DC, and London, as well as on-the-ground experts and resources in more than a hundred countries. Our analysts are highly trained political scientists with extensive experience in the public and private sectors.

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