Three stories are now being widely told about the Chinese economy. First, the government’s year-long campaign to crack down on excessive investment has failed. Second, the investment crackdown is succeeding and consumption is about to take over as the economy’s main driver. Third, China’s export machine could grind to a halt if demand collapses in the United States.
The first two stories are false, and the third is only half-true. Here is the real outlook for China’s economy this year. First, investment controls are working, and will remain in place throughout the year. Second, China is years away from being a consumption-driven economy. Third – and most interesting – China’s trade surplus is about to explode, and the political consequences could be severe.
