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China’s Bad Growth Bet

LONDON – I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country’s long-term growth model. My visits deepened my view that there is a potentially destabilizing contradiction between China’s short- and medium-term economic performance.

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.