Short Run Effects of The Economic Reform Agenda

China’s size limits its capacity to source further growth from exports and so the inevitable turn inward is in progress. Thus far, key home policy drivers have been fiscal expansion and public investment, though provincial indebtedness will constrain these in future and growth will be driven by the reform agenda, including further industrial reform and “internationalisation”. The short run effects of these domestic policy and external shocks are examined using a model of the Chinese economy that takes explicit account of oligopoly behaviour. The results confirm that industrial reform in heavy manufacturing and services would reduce costs and foster growth in output, private consumption and modern sector employment. At the same time, while China’s private investment will be sensitive to the uncertain effects of internationalisation, increased nominal exchange rate flexibility would offer a reliable cushion.