Sustaining Growth: A Projection of China’s Rebalancing Efforts towards Domestic Consumption

According to the macroeconomic identity, combined private sector and public sector balance should match current account balance in any economy. This senior project applies the macroeconomic identity to Chinese data, and analyzes systematically China’s economic structure. The analysis finds that China is not as reliant on trade as people normally think despite that the private sector is running a large surplus. Furthermore, it also shows that the private sector can be induced to spend more, and the public sector has much potential to increase deficit spending. Based on these results, I recommend a combination of 10% to 20% exchange rate appreciation, financial liberalization, equalizing tax between trade and non-trade departments, and increasing public spending. The projected outcome of such policy package is that trade surplus and private sector surplus will both decrease, and correspondingly public sector deficit will increase. Such outcome can help China to reduce trade imbalance and ease overheating in terms of overinvestment, thus creating a more sustainable growth pattern that is hinged on domestic consumption