Reform is key for Chinese economy

The Chinese economy is experiencing a painful restructuring. The government should draw lessons from its earlier macrocontrol measures and actively deleverage its economy and finances, to let the market play a bigger role in allocating resources, says an article in 21st Century Business Herald. Excerpts:

Some provinces unexpectedly saw a collective plummet of their economic growth in the first quarter of this year. The economy of provinces in the central part of China did not rise as they were expected to, but declined, especially in regions dependent on energy and resources, such as Heilongjiang, the Inner Mongolia autonomous region and Shanxi.

Some analysts once thought these central provinces would be more immune to external influences than the coastal provinces that rely on export-related industries.

Although the central provincial authorities meted out a series of stimulus policies to boost economic growth, the effects were not as positive as expected.

The dip of economic growth in these provinces was also caused by their overreliance on investment for infrastructure construction and some overcapacity industries.

It usually takes a long time for investors, mainly the governments that raise funds through various means, to see returns from these projects. Therefore, some governments have to borrow new funds to repay old debts, which leads the economy into a vicious cycle.

These are periodic issues. The Chinese economy may have entered a risky stage where the inventory cycle, capital expenditure cycle and real estate cycle overlap each other.

The central government should pay more attention to cleaning the balance sheet through deleveraging rather than simply taking counter-cycle macrocontrol measures.

Past experience shows that the government does not have the ability to accurately measure and control economic periods.

The central government’s huge stimulus package in 2008 forces the government today to try its best to solve the side effects of its own policies. The Yangtze River Delta, a main economic engine in China, is now laden with overcapacity industries and debt deflation. The region should have served as a pioneer in China’s financial reform but some places in the region have become hotbeds for nonperforming assets.

The aging population and a scarcity of genuine savings are quickly eating the government’s resources to take counter-cycle measures.

The central government had hoped the central and western regions of China could become new engines of growth. The facts are these regions have a serious lack of innovation, technology and quality workforce compared with the eastern provinces.

Reform is the only way out now, for not only Chinese economy, but also the government itself.