Keyu Jin writes: Pessimism about China has become pervasive in recent months, with fear of a “China meltdown” sending shock waves through stock markets worldwide since the beginning of the year. And practically everyone, it seems, is going short on the country.
There is certainly plenty of reason for concern. GDP growth has slowed sharply; corporate-debt ratios are unprecedentedly high; the currency is sliding; equity markets are exceptionally volatile; and capital is flowing out of the country at an alarming pace. The question is why this is happening, and whether China’s authorities can fix it, before it is too late.
The popular – and official – view is that China is undergoing a transition to a “new normal” of slower GDP growth, underpinned by domestic consumption, rather than exports. And, as usual, a handful of economic studies have been found to justify the concept. But this interpretation, while convenient, can provide only false comfort.
China’s problem is not that it is “in transition.” It is that the state sector is choking the private sector. Cheap land, cheap capital, and preferential treatment for state-owned enterprises weakens the competitiveness of private firms, which face high borrowing costs and often must rely on family and friends for financing. As a result, many private firms have turned away from their core business to speculate in the equities and property markets.
Chinese households are also squeezed. In just 15 years, household income has fallen from 70% of GDP to 60%.
China has proved its capacity to implement radical reforms that eliminate major distortions, thereby boosting growth and absorbing excess debt.
The Chinese government launched a raft of radical reforms, including large-scale privatization of industry and elimination of price controls and protectionist policies and regulations.
This time around, however, the task facing China’s government is complicated by political and social constraints. The economic reforms China needs now presuppose political reform; but those reforms are hampered by fears of the social repercussions.
The good news is that China has a promising track record on this front.
A similar ideological shift is needed today, only this time the focus must be on institutional development. S
With a concerted effort to create a level playing field that gives more people a bigger piece of the economic pie, not to mention more transparent governance and a stronger social safety net, China’s government could reinforce its legitimacy and credibility.
China’s experience in the 1990s suggests that the country can bounce back from its current struggles.
If economic conditions worsen, as seems plausible, action will become unavoidable. Good times may breed crises in the West; in China, it is crises that bring better times.