6  BIS Review 124/2006  transmission mechanism and by the relative inflexibility of the exchange rate, which inhibit the central bank's ability to keep inflation low and to stabilize the economy. The principal imbalance lies in the composition of Chinese GDP, which is heavily tilted toward investment and net exports and away from domestic consumption and government provision of social services.
A better balance would improve the welfare of the Chinese people (by increasing consumption and social services) and would increase global financial stability (by reducing China's current account and trade surpluses). The Chinese government has undertaken to reduce this imbalance by taking measures to expand domestic demand, especially household consumption, and I hope that these efforts will be successful.