I am often asked, especially by my Peking University students, to list what I think is the sequence of steps China will take to address its economic imbalances. Remember that rebalancing, in the Chinese context, has a very specific definition. It means raising the consumption share of GDP. This is just a way of saying that consumption growth must outpace GDP growth, and over the next few years it inevitably will, if the rest of the world is unable to absorb a rising Chinese trade surplus.

But there are many ways this can happen. The good way is by a surge in consumption growth that allows GDP growth to remain strong. The bad way is for consumption growth to slow, and for GDP growth to slow much more rapidly.

So how will China rebalance? Unfortunately there is no obvious answer. I always tell my students that even if I were smart enough to know the optimal sequence, it would nonetheless be very difficult to make any reasonable prediction since the sequence is not likely to be subject to economic analysis. This is as much or more a political issue as it is economic, for at least two reasons:

1.The rebalancing process will cause short-term pain and perhaps a rise in unemployment. Postponing it will make both of those problems worse when the adjustment finally takes place. China has to choose when is the best time to begin that process, and this depends on a lot of social and political factors. Most obviously, the 2012 succession process is a key variable.

2.Because rebalancing mainly means increasing the household income share of national income and, with it, the household consumption share, it implicitly means redistributing income from businesses and governments to households, and exactly which businesses, governments, and households depend on which adjustment mechanism. There are several ways to rebalance, each with different implications for social policy, making it an issue that must be determined not by economists but by political leaders.