We should welcome China's economic slowdown,"because by favoring structural reforms over short-term stimulus, China’s leadership is showing their commitment to move to a more balanced and sustainable growth model",says
Steven Barnett of the IMF.
China's model borrow and invest worked well to prop up growth. At least for a while. But eventually, debt rises, investment becomes less productive, and the risks rise.
Steven Barnett of the IMF.
China's model borrow and invest worked well to prop up growth. At least for a while. But eventually, debt rises, investment becomes less productive, and the risks rise.
Fortunately, China’s economy still has considerable buffers. The risks to the outlook in the near-term, therefore, is extremely low. But the economy is becoming more vulnerable on several fronts: surging credit, strains on local government finances, and weakening balance sheets in parts of the corporate sector. Credit provides the clearest example. A broad measure of credit (total social financing) had held steady at about 130 percent of GDP for much of the 2000s. However, since 2008, it has shot up to around 200 percent of GDP;an increase of 70 percent of GDP in 4½ years.
Not surprising, therefore, that investment is also booming. Investment accounts for nearly half of the economy’s output, which is among the highest in the world. Indeed, it is also high relative to the historical experience of other fast growing economies.But the current model of China's growth is not sustainable in the long run,as more output goes to investment,and less goes into consumption. The high rate of investment builds in overcapacity, and the lower rate of consumption brings lower growth of GDP.
Reversing this trend requires rebalancing growth away from investment and towards consumption.
Achieving more balanced and sustainable growth will hinge on implementation of a package of reforms. Let’s focus on two areas of the package: further strengthening of the financial sector and opening the service sector to more competition.
In this new model growth would be slower. In the coming years, taming rising risks in the economy—by reigning in credit growth and rationalizing investment, will likely slow the economy.
"We estimate that with reforms China’s growth could average around 6 percent a year from now to 2030. By all measures—except perhaps China’s 10 percent average annual growth over the past 30 years—this would be a fantastic outcome. Especially when compared to a status-quo scenario, in which China could very well get stuck in the middle-income trap and income per person would peak at around 25 percent of that in the United States in 2030. In contrast, with successful reforms, income per person in China could reach 40 percent of the U.S. level by 2030",says Steve Barnett.
"Somewhat slower growth in the near-term is a tradeoff worth making for higher future income. This is clearly good not only for China, but also the world economy. By 2030 China—especially with successful reforms—will almost certainly be the world’s largest economy. So China’s success—which will substantially increase income in China—will also mean much higher global demand and will thus be hugely important for a robust and healthy global economy".
Source: by Steve Barnett IMF
