James Pethokoukis

Politics and policy from inside Washington

Will China shift economic gears?

August 9, 2011

Hey, China’s got economic problems, too. Excellent piece on the challenges facing the Middle Kingdom:

The lift that keeps the ‘build-it-and-they-will-come’ model going – largely policy inertia tied to a massive stimulus plan and tight relationships between banks, state-owned companies, and local governments – can’t defy economic gravity forever. .. A policy shift towards building the middle class would bring a host of benefits: Freeing up financial resources to capital-starved small- and medium-sized enterprises to create durable job growth; reduced cement and steel production, two of China’s most energy intensive industries, to help lower inflationary pressures in commodities like coal, oil, and iron ore while also cutting emissions; and a boost in domestic consumption to relieve trade tensions as personal incomes rise along with imports.

This will require a degree of political will unseen to date. Economic modernization now risks stalling at best, and reversing at worst, with increased government control. … Without a true middle class revolution, China’s economic foundations will increasingly rest on shifting sands. Ghost towns will remain empty, property investors will see diminishing returns, and banks will struggle with increasing defaults. China may be a victim of its own success, arriving at an economic fork in the road sooner than expected – one path leads to enriching the masses, the other back to business as usual.

I doubt whether such political will exists in Beijing. Lots of powerful people and their families are getting rich from the current economic arrangement, so why push preemptive change. Like a football coach, leaders will keep running the same play until it clearly fails to work. That is my guess, at least.

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