China should not liberalize the economy
Special points to highlight in this issue:
• There are two different reform programs proposed for China which are often conflated, but in fact the two programs are very different and in conflict.
• The mainstream reform program consists of reforming institutions in order to enhance productivity growth enough to allow China to grow out of its debt burden. It assumes that if it implements the right set of reforms, Beijing can keep China growing at current rates for many more years.
• The alternative program sees China’s excessive debt burden as acting as a major constraint to growth, so that the only way Beijing can prevent growth from decelerating sharply is for it to continue to allow credit growth to accelerate. According to this view, unless Beijing moves quickly to reduce the debt burden by assigning the cost of debt-servicing to local governments – i.e. forcing them to liquidate assets and use the proceeds to pay down debt directly or indirectly – China will be condemned to many decades of very low growth.
• What is more, the liberalizing reforms proposed in the mainstream reform program are likely to erode Beijing’s ability to protect China from financial crisis.
Now read on...
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