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China’s Vicious Growth Circle

Most economists have a reason to be worried about China’s economy – whether it be low consumption, industrial overcapacity, environmental degradation, or government interventions. What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.

LONDON – Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.

That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization.

Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.

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