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Will China Confront a Revolution of Rising Expectations?

Amid much discussion of the challenges facing the Chinese economy, the line-up of usual suspects typically excludes the most worrying scenario of all: popular unrest. While skeptics would contend that widespread protest against the regime and its policies is unlikely, events elsewhere suggest that China is not immune.

ZURICH – For over a decade, China has accounted for a quarter or more of global economic growth. With its economy currently navigating a rough patch, the question is whether this impressive performance will persist.

Cassandras pointing to the possibility of a Chinese growth slowdown regularly invoke the specter of a middle-income trap. Now that China is no longer poor, they warn, growth rates will fall, just as they have in all but a handful countries that have reached the same income level. Growth is harder, they observe, when it can no longer be based on brute-force capital accumulation. Now, it must be based on innovation, which is difficult to bring about in an economy that is still centrally directed.

Then there is the corporate sector’s heavy debt load. A decline in earnings could render many of these debts unsustainable. Whether the upshot is cascading defaults or a flurry of bailouts that shift the burden to the government, the result would weaken the country’s finances and sap investor confidence.

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