Bulletin – June Quarter 2015 Potential Growth and Rebalancing in China Abstract

In rapidly growing emerging economies such as China, it can be difficult to distinguish changes in long-term trends in growth from short-term macroeconomic cycles. This article provides a narrative account of recent phases in Chinese economic growth, and explores the role of cyclical and structural factors in shaping China's recent growth performance. It reviews evidence documented by Lu and Cai (2014) suggesting that the slowing of GDP growth in recent years has resulted from a decline in the potential growth rate rather than being a cyclical downturn. The article emphasises the positive impact that reforms which raise labour force participation and productivity could have on the growth of potential output in China. It suggests that ‘rebalancing’ the economy's demand from investment and exports towards consumption may not be sufficient to prevent a decline in potential growth but that, at a minimum, such rebalancing would probably be conducive to a more stable macroeconomic cycle.

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