How Can China Reduce Its Reliance on Net Exports?
China’s decision to allow its exchange rate to fluctuate has been welcomed by the United States as a necessary step toward global rebalancing. The upward currency revaluation has lifted some international pressure from China and defused criticism that its artificially low renminbi gives it an unfair trade advantage. Allowing greater exchange rate flexibility also puts China in a stronger negotiating position ahead of the upcoming G20 meeting in Canada. Yet despite this positive development, other significant factors will continue to impede China’s transition towards a healthier balance of trade. As long as China continues to subsidize its production growth at the expense of household income, it will have difficulty increasing domestic demand and cutting its reliance on exports. Michael Pettis, a Carnegie Senior Associate and a leading economist based in Beijing, discussed China’s economic outlook in light of both internal constraints and external shocks. Carnegie’s Douglas Paal moderat
