Michael Pettis explains why Xi's aim to double China's economy is a fantasy unless Beijing boosts consumption by raising the household share of income from 50 to 70 percent -- a move that local governments and elites have resisted.
"Every country that followed the high-savings, investment-led growth model that China adopted in the early 1990s -- such as Japan in the 1970s and 1980s, or Brazil in the decade before -- has gone through three distinct stages. The first stage, characterized by heavy investment in badly-needed infrastructure, delivered many years of rapid but unbalanced growth. In that stage, debt grew in line with the economy because when debt mostly funds productive investment, gross domestic product grows faster than debt.
"In the second stage, as each country sought to rebalance demand away from investment, typically with little success, growth remained fairly high, although now driven increasingly by non-productive investment. When this happens, total debt in the economy must grow faster than GDP. So the debt burden rose.
"Finally in the third stage, the country either reached its debt capacity limits or a worried government took steps to prevent debt from rising further. Either way, the economy was forced finally to rebalance away from investment and towards consumption amid far slower, sometimes even negative, growth.
"China today is clearly in the second stage."