Andy Xie – The Last Chance for Survival for the Chinese Economy

Andy Xie, our renowned Chinese economist, wrote an article in CaixinOnline on what he considers to be the last chance for survival for the Chinese economy. With China facing an array of problems –a looming banking crisis being the most critical – Andy says that changes must be made to unleash untapped productivity…

Andy Xie_KIF

The Last Chance for Survival

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China’s economy has become dependent on the bubble to turn bank loans and gray income into government revenue. If the bubble pops, the government will be destabilized. If the bubble remains, society is destabilized. The country must choose.

The bubble is a form of leverage, i.e., borrowing from the future, in achieving growth. Lending new money for repayment is another. Unsafe food and polluted water and air are also manifestations of not paying the full price for growth. China is stretching its society to the limits for the sake of sustaining growth, all in the name of social stability. But, China suffers a labor shortage and inflation. Growth under the existing model exacerbates both. How could such growth be good for social stability?

The labor shortage provides a good background for restructuring the economy. The country’s position as the factory of the world is still solid. Hence, any slowdown from restructuring the economy would be limited and would not lead to destabilizing high levels of unemployment. The resulting low inflation would enhance social stability.

If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for -survival, not a choice.

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Capping the State Sector

Even though reforms are recognized as necessary and inevitable, the excuse is often given that they are just too hard. Resistance from vested interests is often used for advocating patience. First, when the economy is on the brink, the resistance from vested interests should not justify taking no action. After all, the government is supposed to be all powerful. Second, an effective option is to cap public spending at the current level, not reducing it. It cannot be too hard to live on the same money as yesterday. The vested interests ought to be able to live with that.

China’s labor force is quite productive. This is why the country’s position as the factory of the world is solid. Even in labor-intensive industries like textiles and garments, it remains on top of the world, ten times bigger than Vietnam’s even though Vietnam’s wage level is half of China’s. In the electronics industry, no other country is coming to take China’s market share. In machinery, the momentum is decidedly on China’s side.

When the state sector caps its spending, the growth in capital supply will go to the household sector and private enterprises. The overall capital efficiency will gradually improve. China’s economy would regain momentum through productivity improvement.

No other country in the world has the option to go forward like China. Its untapped labor productivity is so vast that, when released, it could solve all the problems that the country faces. All it takes is for the state sector to take a step back. That cannot be too hard to implement.

Read the entire article at CaixinOnline

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