Chinese children on sidewalk in Beijing

China’s Monetary-Policy Choice

China’s economy has followed a remarkable course in recent years: from record-breaking powerhouse to major global risk. How did China get here, and can it put its economic growth back on track?

SHANGHAI – China’s economy has followed a remarkable course in recent years: from record-breaking powerhouse to major global risk, at least in the eyes of some. Indeed, with GDP growth this year almost certain not to reach the authorities’ 7% target, the world is now watching closely for signs of crisis and a much sharper slowdown. How did China get here, and can it put its economic growth back on track?

China’s growth has been unsustainable for a while. A stimulus package of less-than-prudent fixed-asset investment, adopted in response to the 2008 global financial crisis, sustained 9% GDP growth for two years. But, after 2011, stimulus turned to macroeconomic tightening, causing investment growth to plummet from a nominal rate of over 30% to about 10% recently. This prevents full utilization of production capacity and resources, and explains why GDP growth above 7% is simply not possible.

Excess capacity and falling growth are mutually reinforcing. Not only does excess capacity have a negative impact on growth; perhaps more important, sharply declining growth also contributes to massive redundancy in some industries (especially resources and the heavy and chemical industries).

https://prosyn.org/a3tg8Hp