Capital and resource prices are too cheap, Zhu said, which has led to an unhealthy glut of investment and a “risky” situation in which only 60 percent of the country’s industrial capacity is being used. More money needs to be pushed to families in the form of jobs and wages to boost consumption. The country’s leaders need to speed the opening of the service sector and shift away from the manufacturing focus that has driven Chinese growth for 20 years.
“The key issue for China is not growth. . . . It is the quality of growth and reform,” Zhu said. “China should discourage investment. Currently loans are cheap and the factor price is so low — energy, transportation, water, power — those things all encourage the expansion of investment.”
So much of the country’s resources are pushed toward investment projects, he said, that it “squashed people’s income levels” and prevented a faster increase in local consumption.
His analysis echoes issues raised by U.S. government and business officials in their critiques of Chinese economic policy — particularly the reference to the way government policies have encouraged overinvestment at the expense of household consumption. Developed nations have long hoped that the pressure put on their manufacturing companies by Chinese goods would be offset when China’s 1.6 billion people start buying more and the economy there is opened to competition in more areas.
The Hopkins speech was one of Zhu’s most substantive U.S. appearances since he joined the IMF in May 2010 as a special adviser to then-Managing Director Dominique Strauss-Kahn. Zhu’s hiring and eventual promotion to deputy managing director was seen as part of a broader effort by the IMF to acknowledge China’s expanding importance in world economic affairs. He had been a deputy governor at the People’s Bank of China, considered a center of reformist economic thinking within the Chinese government.
Zhu’s remarks Tuesday were focused on fund efforts to better understand the emerging shape of the world economy and the implications of the extensive connections that have arisen among countries. That “hyper-connectivity,” as Zhu called it, has boosted growth in many parts of the world but also has allowed problems to ripple quickly across borders.
If there was doubt about the changing nature of global income, Zhu said that, by some measures, 2013 is expected to be the year when economic output from developing nations exceeds that of the traditional industrialized countries.
His comments come as China is completing its transition to a new leadership and government. Incoming leaders have endorsed in broad strokes the need for China to open its financial sector and rely more on domestic consumption for economic growth.
Still unclear is how fast and dramatically they intend to move.
“The most important issue is moving the growth model from investment-driven growth to domestic consumption,” Zhu said. “Many people say that. The question is how.”