``Regular readers of my newsletter may be surprised to see me say this.  For the past four or five years analysts have been earnestly assuring us that the rebalancing process had finally begun, and I had always insisted that it couldn't have begun yet.

Why?  Because as I understand it rebalancing is almost arithmetically impossible under conditions of high GDP growth rates and low real interest rates.  Once the real numbers came in, it always turned out that in fact imbalances had gotten worse, not better. 


Now for the first time I think maybe the long-awaited Chinese rebalancing may have finally started. 


The key to raising the consumption share of growth, as I have discussed many times, is to get household income to rise from its unprecedentedly low share of GDP.  This requires that among other things China increase wages, revalue the renminbi and, most importantly, reduce the enormous financial repression tax that households implicitly pay to borrowers in the form of artificially low interest rates.


China bulls, late to understand the unhealthy implications of the distortions that generated so much growth in the past, have finally recognized how urgent the rebalancing is, but they still fail to understand that this cannot happen at high growth rates.  The problem is mainly one of arithmetic.  China's investment growth rate must fall for many years before the household income share of GDP is high enough for consumption to replace investment as the engine of rapid growth.

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