1/8 Good FT article on China's intractably unbalanced economy: "China’s seeming reluctance to rebalance its economy is one of the great challenges facing global financial systems, threatening to worsen Beijing’s trade and diplomatic relations." https://www.ft.com/content/35471cfb-79a6-42c1-8e41-447bfaad2c36… via @Financial Times

2/8 The Chinese economy has locked itself into a system in which every economic problem is met by supply-side policies that expand investment or, more precisely, that force households to increase their indirect transfers to investment and manufacturing.

3/8 But when the problem is excess savings, the solution cannot be to boost the supply side further. It must be to boost the demand side, something China finds extraordinarily difficult to do, largely because it would mean unwinding political, financial, business and other...

4/8 institutions built around four decades of implicit and often explicit transfers from households to businesses and investment. While necessary for China in the medium and long term, this would almost certainly mean much slower growth or even a contraction in the short term.

5/8 That is probably why every other country caught up in this high-savings model has found it so difficult to adjust. As Albert Hirschman explained in the 1970s, its not just about shifting a few policies. It's about reversing entrenched political and economic institutions.

6/8 Among other things the article cites Renda's Liu Zhiqin as saying: “The conflicts in Europe and currently in the Middle East have repeatedly proven the importance of maintaining a robust manufacturing capacity and ample inventory.”

7/8 He may be right, but Beijing seems surprised that the US, the EU, India, Japan and the rest of the world might think the same way, and so refuse to lose manufacturing capacity to satisfy China's need to resolve its weak domestic demand by further expanding manufacturing.

8/8 That's the problem facing China: everyone can't expand or maintain its share of global manufacturing at the same time, but expanding its share of global manufacturing is the least bad investment option for China if it wants to maintain high GDP growth rates.