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Chinas Incomplete Growth Strategy

BEIJING Chinas economic growth has been slowing for six years far

longer than expected Eager to stem the slide! Chinese go"ernment

o#cials and economists ha"e desperately so$ght a clear explanation

pointing toward an e%ecti"e policy response &nd! last No"ember! theyo#cially placed the blame on long'term s$pply'side shortcomings! which

they pledged to address with far'reaching str$ct$ral reforms

B$t! altho$gh Chinese o#cials sho$ld be appla$ded for their

commitment to implementing painf$l and badly needed str$ct$ral

reforms! the s$pply'side foc$s largely ignores the present China faces

two separate challenges( the long'term iss$e of a declining potential

growth rate and the immediate problem of below'potential act$al

growth

&mong the long'term factors $ndermining potential growth are

diminishing ret$rns to scale! a widening income gap! and a narrowing

scope for technological catch'$p thro$gh imitation )oreo"er! e"en as

the co$ntrys demographic di"idend dissol"es! its carrying capacity *the

si+e of the pop$lation the en"ironment can s$stain, is being exha$sted

a sit$ation that high le"els of poll$tion are certainly not helping -inally!

and most important! the co$ntry is s$%ering from inade.$ate progress

on mar/et'orientated reform

0hile some of these factors are irre"ersible! others can be addressed

e%ecti"ely &nd! indeed! the go"ernments s$pply'side reform strategy

will go a long way toward doing 1$st that! $ltimately stabili+ing and e"enraising Chinas growth potential B$t! contrary to pop$lar belief! they will

not boost Chinas act$al growth rate today

0hy are so many economists con"inced that a long'term reform strategy

is all China needs2 3ne reason is the widely held notion that todays

o"ercapacity re4ects s$pply'side problems! not ins$#cient demand

&ccording to this "iew! China sho$ld implement policies li/e tax c$ts to

enco$rage companies to prod$ce prod$cts for which there is gen$ine

demand 5hat way! the go"ernment wo$ld not inad"ertently s$stain

6+ombie enterprises7 that cannot s$r"i"e witho$t ban/ loans and

s$pport from local go"ernments

B$t only some of Chinas o"ercapacity can be attrib$ted to bad

in"estment decisions & large share has emerged beca$se of a lac/ of

e%ecti"e demand &nd that is! at least partly! a res$lt of the

go"ernments e%ort to moderate real'estate in"estment! which has

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ca$sed the sectors ann$al growth to tan/! pl$nging from 89: in ;= consec$ti"e months

real debt rises 5his is $ndermining corporate protability! sp$rring

companies to dele"erage and red$ce in"estment! and f$eling f$rther

declines in AAI

5he end$ring importance of real'estate in"estment to Chinas economic

growth is re4ected in trends from the rst .$arter of this year &nn$al

G@A growth of D:! despite being the slowest rate for any .$arter in

se"en years! exceeded mar/et expectations &nd it was dri"en partly by

an $nforeseen increase in real'estate in"estment growth! to :

5his is not to say that what China needs is more real'estate in"estment

&ccording to the National B$rea$ of Statistics! China had D=9 million

s.$are meters of $nsold commercial and residential 4oor space at the

end of ; when space $nder constr$ction is factored in! in"entory

expands to more than "e billion s.$are meters 0ith an a"erage of only

=; billion s.$are meters of ho$sing being sold each year! the best way

to red$ce this s$pply gl$t is clear( limit f$t$re constr$ction 3ne of the

most important reasons for the recent in"estment s$rge was ab$ndant

li.$idity dri"ing spec$lati"e demand and that is hardly s$stainable

B$t not all in"estment is created e.$al Infrastr$ct$re in"estment! in

partic$lar! may well be the /ey to tac/ling Chinas economic woes &fter

all! s$ch in"estment! which grew at =F: in the rst .$arter of ;

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economys demand side In the long r$n! it operates thro$gh the s$pply

side to boost prod$cti"ity and th$s raise growth potential China can

f$nd s$ch in"estment with scal decits! gi"en strong demand for

go"ernment bonds &nd! with Chinas ma1or ban/s still state'owned! and

capital controls still in place! the ris/ of an imminent nancial crisis is

"ery low

3f co$rse! Chinas go"ernment m$st $phold its commitment to

implement str$ct$ral reforms B$t infrastr$ct$re in"estment is also badly

needed! not 1$st to pre"ent the economy from sliding f$rther! b$t also to

enable China to generate the s$stained long'term growth that it re.$ires

to achie"e de"eloped'co$ntry stat$s