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ECONOMY & POLICY
China’s Economic Slowdown: Why Stimulus Is a Bad Idea
What Beijing needs to spur growth is not greater spending or easy money, but fundamental reform
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Anyone who thought China was impervious to either the perilous state of the global recovery or the laws of basic economics should take a look at the data streaming out of the country in recent months. GDP growth in the second quarter slipped to 7.6%, the slowest clip in three years. Manufacturing output and exports have been weak and the property sector has stalled. The IMF recently lowered its forecast for China’s growth in 2012 to 8% — which would be the economy’s worst performance since 1999. And with the sagging data have come louder and louder cries for greater government stimulus to pump up growth, as Beijing’s policymakers did successfully after the 2008 financial crisis. “There’s lots more the government can do to ratchet things up,” HSBC said in a recent report.
That’s exactly what China doesn’t need, however. Government policies to greatly boost growth will only exacerbate the percolating dangers within the Chinese economy — dangers that could even result in an economic crisis. Instead, the current slowdown shows how badly China needs a new growth model, and the reform necessary to build one.
For several years now, economists have been warning that China’s growth is unbalanced and, therefore, unsustainable. The economy is too dependent on investment and exports to drive growth, they argue, and to fix that problem, Beijing has to do more to encourage domestic consumption as another pillar of development. Not much has really been done to “rebalance” the economy, however, and sometimes it seemed that didn’t much matter. As the economists babbled, the economy continued to grow.
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As the global recovery stumbles and Europe remains embroiled in a debt crisis, Chinese exports have taken a hit. At home, meanwhile, Beijing’s efforts to control rapidly rising property prices dampened investment in real estate. Property-investment growth in the first half of 2012 was half the rate posted in the same period of 2011. China, though, has nothing else to keep growth going. Its own consumers can’t fill in the gap. Private consumption in China relative to GDP is among the lowest of any major economy and remains constrained by government policies that punish consumers to subsidize investment. Thus the need to rebalance. If China’s consumers played a bigger role in overall national growth, the country would have another leg to stand on when the others weaken.
Why hasn’t China done more to rebalance? The scale of the adjustment necessary to switch from an investment-led to consumption-led growth machine is so monstrous that the country would likely experience a lower rate of growth while it is taking place — something policymakers so far have been reluctant to accept. Rebalancing will also require major reforms within the economy — such as liberalizing regulated interest rates and curtailing the influence of the state sector — which would pinch powerful interest groups. Policymakers have thus chosen to talk about rebalancing while perpetuating the policies that prevent it from happening.
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