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China’s Damaging Policy Disruptions

Like an overprotective parent, China’s central government needs to learn to let go. While a more relaxed approach to economic management carries some short-term risks, it is essential to future growth and prosperity.

SHANGHAI – China’s economic growth is expected to have slowed to just over 6% this year, and it is unlikely to accelerate anytime soon. In fact, economic commentators generally agree that China’s economic performance in 2019 – the worst in nearly 30 years – could be the best for at least a decade. What observers can’t seem to agree on is how worried China should be, or what policymakers can do to improve growth prospects.

Optimists point out that, given the size of China’s economy today, even 6% annual GDP growth translates into larger gains than double-digit growth 25 years ago. That may be true, pessimists note, but slowing GDP growth is hampering per capita income growth – bad news for a country at risk of becoming mired in the middle-income trap – and compounding the fiscal risks stemming from high corporate and local-government debt.

Whichever side of the fence one falls on, one thing is indisputable: policy inconsistencies and governance errors have contributed significantly to China’s economic slowdown. The problem lies in the slow pace of progress on structural reforms. Long-term growth depends on decentralization of government authority, increased marketization, and greater economic liberalization, with the private sector gaining far more access to finance and other factors of production.

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