New PIIE Briefing: China's Economic Transformation: Lessons, Impact, and the Path Forward



China is undergoing a welcome if rocky transition from an economy driven by investment and exports to one in which private consumption and services are the major factor in economic expansion. Several roadblocks stand in the way of achieving this objective, however. Among them are a potentially slowing economy stemming from rising debt levels, a languishing real estate market, and decelerating productivity growth. Chinese leaders have endorsed bold reform measures to reduce the many barriers to progress, but many powerful special interests oppose such changes. The increased volatility and uncertainty surrounding China’s economy and its financial markets have complicated the challenges facing China’s leadership.

To make progress on these and other issues, China would be well advised to conclude new agreements on trade and investment with the United States and other economic partners and to further open up its capital account and develop its fi nancial markets. As the recent turmoil in global markets suggests, the problems facing China affect the global economy in ways that are more far-reaching than ever. This collection of essays by scholars at the Peterson Institute for International Economics (PIIE) is part of a series of interactions and discussions with the China Finance 40 (CF40) Forum, which began in 2012. The papers are intended to illuminate the challenges facing China as it engages increasingly with the global economy and builds on its phenomenal economic success of the past three decades.

This PIIE Briefing begins with an essay by Jeffrey J. Schott and Sean Miner arguing that increasing trade and investment with the United States can spur domestic economic reforms, and that it is also in China’s interest to pursue more multilateral and plurilateral trade pacts. Jacob Kirkegaard looks at fiscal policy in China, the United States, and Europe, and concludes that China should increase transparency in local government fiscal budgeting practices. Tomáš Hellebrandt and Paolo Mauro show how China has been one of the biggest drivers of reducing global income inequality in the recent past, but that its future role in improving overall global welfare looks likely to decline. They call for further investment in infrastructure by China and also discuss the challenges for China in dealing with environment degradation and climate change. Robert Z. Lawrence argues that trade with China, rather than making Americans poorer, as public opinion seems to think, actually raises American living standards. Finally, Silvia Merler and Nicolas Véron examine the challenges of achieving financial reform in both China and the European Union. They argue that China could use the European Union’s highly developed financial system as a point of reference to guide the financial system away from reliance on banks and toward a more market-based system.

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