Cost Distortions and Structural Imbalances in China

This paper attempts to explain the fundamental cause of China’s growing imbalance problems.Economic data confirm that the key structural imbalance problems, such as overinvestment,large current account surpluses, low consumption share of GDP and income inequality,have all deteriorated over the past few years, despite continuous policy efforts to correctthese problems.We argue that the key determining factor is repressed factor cost, which isassociated with heavily distorted markets for labor, capital, land, resources and theenvironment.These are like implicit subsidies for producers, investors and exporters.Theyboost growth and, at the same time, lift investment and exports.Previous policy efforts havefocused more on administrative measures, which have not been sustainable.Therefore, amore fundamental solution to the imbalance problem lies in completing market-orientedreforms for production factors and allowing free markets to determine prices of labor,capital, land and resources.