May 25, 2019 | 04:20 AM


19.08.2013What Can Reignite China's Economic Growth? A Dose Of Creative Destruction

Nowadays that momentum is slowing

Panos Mourdoukoutas, Forbes.com

A dose of creative destruction back in the late1990s—the closure or privatization of inefficient state-owned enterprises—combined with easy credit, local fiscal stimulus, and strong exports helped the Chinese economy grow by leaps and bounds and become the world’s second largest economy.

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Nowadays that momentum is slowing, and many economic analysts and international agencies see even lower growth rates ahead.

On July 8, Citigroup C +1.71% cut its estimate to 7.4% from 7.6% for 2013, and to 7.1% from 7.3% for 2014. On July 10, the InternationalMonetary Fund (IMF ) lowered its own growth forecast from 8.1% to 7.8% for 2013; and from 8.3% to 7.7% for 2014. Even Chinese officials have grown pessimistic, with finance minister Lou Jiweito expecting a 7% GDP growth in 2013.

Anything north of 7% is a good number compared to anemic growth elsewhere, and could confirm a soft landing. Nonetheless, some China observers are concerned about the growing corporate and local government debt and the safety of its banking system.

“Chinese companies and local governments have borrowed recklessly to build factories, train stations, and bridges to nowhere,” wrote Barron’s Jonathan R. Laing in a recent cover story China’s looming debt crisis. “Miles upon miles of empty apartment buildings rim hundreds of Chinese cities; industries suffer from rampant overcapacity; and largely empty new highways, bridges, shopping malls, railroad stations, and airports more than hint at problems.”

That would certainly spell trouble for the country’s state-owned banking system, which has financed these projects. “From the beginning of 2009 to the end of June this year, Chinese banks have issued roughly 35 trillion yuan ($5.4 trillion) in new loans, equal to 73 percent of China’s GDP in 2011” writes Professor Minxin Pei in the Diplomat.  “About two-thirds of these loans were made in 2009 and 2010, as part of Beijing’s stimulus package.  Unlike deficit-financed stimulus packages in the West, China’s colossal stimulus package of 2009 was funded mainly by bank credit (at least 60 percent, to be exact), not government borrowing.”

Compounding the problem identified by Professor Pei has been a failure to pursue credit expansion by government-owned banks to government-owned corporations and municipalities has not been undertaken in order to enhance the productive capacity of the Chinese economy. Instead, that pursuit has been for the sake of stimulating short-term growth.

Simply put, building bridges that too few people travel, train stations that too few people visit, and buildings that remain vacant, is hardly a way to place an economy on a path to sustainable growth. While such projects create what standard macroeconomic textbooks describe as multiplier effect — multiple rounds of income and spending that boost economic growth while the project lasts – they fail to create the accelerator effect that boosts economic growth once these projects are finished and placed in use.

That’s why China doesn’t need another stimulus, but another dose of creative destruction. It needs to sever government-to-government relations — which misallocate capital — and make the transformation from an export-led economy to a consumer-led economy, as Japan did back in the 1980s and 1990s

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