1/9 “In the past three years the recovery of production is obviously better than the recovery of consumption,” according to Wang Yiming. Reviving consumption, he says, is “particularly important” for China’s economic recovery. sc.mp/35vc?utm_sourc… via @South China Morning Post

2/9 He's right, of course, and it seems more and more policy advisors are calling for measures to boost consumption. The problem is that these measures all implicitly involve transfers to households that will be politically hard to implement.

3/9 While a rising number of policy advisors agree that China must rebalance, in other words, the real trick is engineering the the transfers, and that seems to be something about which no one wants, or is able, to propose specific policies.

4/9 One vague proposal floating around is that Beijing should borrow RMB 1 trillion to deliver to households. That will help, but it's too little. It won't even begin to reverse just the decline of the consumption share in the past three years, let alone rebalance the economy.

5/9 It would probably take annual transfers of roughly RMB 5 trillion if China is to to grow sustainably by more than 4% annually, and given recent centralizing trends, I don't think Beijing will want to take on a commitment to fund such large transfers.

6/9 The only other way to do it is to force the transfers onto local governments, but this is also likely to be extremely difficult. Especially with such huge differences in government capacity in different regions, there is likely to be enormous resistance among local elites.

7/9 My point is that without specifying the extent and nature of the transfers needed, and how they are to be paid for, it is inconsistent to propose both rebalancing the economy and maintaining medium-term GDP growth rates of above 4% .

8/9 China cannot continue investing anywhere near 42% of its GDP, and as it reduces investment, the economy must slow dramatically unless consumption growth surges, but the only way to get consumption to surge while the economy is slowing is with massive income transfers.

9/9 This has never happened before in other countries that followed this growth model, probably because the needed transfers were politically too difficult to pull off, but without them, I expect China's sustainable GDP growth rate China to be less than 2-3%.

2/3 Japan, for example, has been trying (with little success) to raise domestic demand for three decades. The problem seems to be that the higher wages that boost domestic demand also erode export competitiveness.

3/3 Their export competitiveness, after all, is mainly the obverse of their low household-income share of GDP, and raising the latter means undermining the former, something which they have been unwilling to do. There's no reason to think this will be easier for China.