A major policy push to boost domestic demand would both reflate China’s economy and reduce its large current account surplus, which is a source of tension with other countries. But this looks unlikely given concerns about diminishing monetary and fiscal space. Instead, the upcoming Five-Year Plan is likely to attempt to address the country’s internal imbalance by shifting the composition of domestic demand from investment toward consumption. This will make China’s external imbalance worse unless there is an offsetting currency appreciation, which policymakers may try to resist.
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