Li’s Balancing Act

SHANGHAI – Three years of persistent economic slowdown have rattled Chinese economists and policymakers. Financial analysts are in a tizzy over whether GDP growth will fall below 7%, parsing official statements for clues as to whether and when the government will act.

The government’s financial viziers seem none too alarmed. Beneath this cool exterior, however, China’s leaders are very worried indeed. As Liu Shijin, Vice Minister of the Development Research Center of the State Council, recently explained, the dilemma facing the authorities is that another massive stimulus plan to boost growth would mean more outstanding credit – a problematic approach, given the enormous debt and financial risks that local governments have accumulated. But an excessively sluggish economy poses its own risks.

To be sure, China’s government was in a similar situation ten years ago. But the economy today is not performing as it was a decade ago. China needs new solutions.

To varying degrees, China’s economy has long swung from short-term growth spurts, fueled by the over-issuance of currency and conventional credit expansion, to contraction, triggered by government action to prevent overheating. Once the risks are under control, the government gradually restores growth-oriented policies. This “prosperity cycle” – sustained by the abundance of new investment opportunities that were available to neutralize mounting debt and financial risks – has long enabled China to avoid a hard landing.