Kevin Frayer/Stringer

China’s Incomplete Growth Strategy

While China's leaders should be applauded for their commitment to implementing painful structural reforms, they are ignoring the present. In fact, China faces two separate challenges: the long-term issue of a declining potential growth rate and the immediate problem of below-potential actual growth.

BEIJING – China’s economic growth has been slowing for six years – far longer than expected. Eager to stem the slide, Chinese government officials and economists have desperately sought a clear explanation pointing toward an effective policy response. And, last November, they officially placed the blame on long-term supply-side shortcomings, which they pledged to address with far-reaching structural reforms.

But, although Chinese officials should be applauded for their commitment to implementing painful – and badly needed – structural reforms, the supply-side focus largely ignores the present. China faces two separate challenges: the long-term issue of a declining potential growth rate and the immediate problem of below-potential actual growth.

Among the long-term factors undermining potential growth are diminishing returns to scale, a widening income gap, and a narrowing scope for technological catch-up through imitation. Moreover, even as the country’s demographic dividend dissolves, its carrying capacity (the size of the population the environment can sustain) is being exhausted – a situation that high levels of pollution are certainly not helping. Finally, and most important, the country is suffering from inadequate progress on market-orientated reform.

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