- China's macro economy is imbalanced. Investment’s share of GDP is around 49 percent, an unprecedented level.
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- The efficiency of this capital investment has fallen since 2008, as shown by falling returns on capital
and the inability of recent credit growth to deliver faster growth.
- The cost of this inefficient investment is born by China’s savers.
- The deposit rate at commercial banks is held low by the government. This reduces household incomes from savings
but ensures that China’s banks retain high profitability.
- artificially low input costs skew incentives towards resource intensive sectors like manufacturing
and heavy industry, at the expense of less resource intensive sectors, like services.
- the land system combines with central-local fiscal relations to fuel real estate investment.
- subsidised banking profits and cronyism, reduces incentives for risk management.
- A necessary corollary of China’s extraordinarily high level of capital formation is a very low level of
consumption as a proportion of GDP.
- Chinese consumption of itself has been growing rapidly in recent years, averaging over 9 percent annual growth
since 2008, faster than any other East Asian Economy
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- incomes are suppressed.
- high levels of precautionary savings are still incentivised by inadequacies in China’s social security system.
- service sector development is held back.
- The balance between investment and consumption appears to have stabilised in the last two years.
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- The main objectives of these reforms are to raise incomes, reduce savings and improve the business environment.