The need for China to rebalance its economy away from investment and toward consumption is well known. Also widely known is the policy prescription for that rebalancing: allow more interest rate and exchange rate flexibility, strengthen the social safety net, and make state enterprises pay higher dividends to the state. But how does the economy actually make this adjustment to one that has a higher proportion of GDP derived from consumer spending? Less publicized are the mechanics of how the Chinese economy will move to a higher consumption-to-GDP ratio, and which is the best path to take.
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