Awards: Stars of China 2012


By Thomas Clouse

Chinese policymakers must find news ways to boost domestic consumption and reduce economic reliance on stimulus investing in order to balance short- and long-term growth goals.

300 Features 14 Awards Stars of China

China’s economic planners have performed a careful balancing act in recent decades, taking gradual, measured steps and adjusting as they go. This approach has been quite successful, but now the economy’s size and complexity, and globalization more generally, have left China teetering more precariously than ever before.

The economy is showing signs of decelerating, expanding by a three-year-low rate of 7.6% in the second quarter. Initial numbers on industrial production and other measures indicate that third-quarter growth will also be weak. Policymakers are working on a proper response, but reaching a balance between short-term and long-term objectives is not easy. The central bank has cut reserve and interest rates several times in the past year.

The extent of new stimulus spending will likely be limited, however, by the constraints of local government finance. Local governments depend on land sales to raise revenue, and the weakening property market is cutting into public finances. The government could help local governments by putting pressure on banks to lend, but that would likely undo much of the progress made on banking reform. Banks and regulators are still trying to assess the full value of loans to local government investment vehicles (LGIVs) from the last round of stimulus in 2009. Many of those loans are reaching maturity.

The government has also sped up the approval process for new projects, as a subtle economic stimulus. Pushing more money into stimulus projects will also exacerbate China’s dependency on investment to fuel growth. Investment already accounts for around 50% of China’s GDP, and the share of GDP accounted for by household consumption remains the lowest among the major economies of the world. To create a more sustainable long-term economic model, China’s must ensure that consumers receive more of the money that currently flows into fixed-asset investment. To reduce China’s dependence on investment, the government needs to take steps to relinquish some control over the economy. Giving more freedom to the financial sector would eventually lead to more efficient use of capital and facilitate lending to more labor-intensive private companies, boosting wages and employment.

The Communist Party, meanwhile, is in the midst of a once-a-decade leadership transition, adding to the need for stability. Alistair Thornton, senior China economist for IHS Global Insight, explains, “The bottom line is that if the government wants to revive growth, it can. But it doesn’t come free. The harder they push to save the short term, the harder it will be to save the long term.”