What kinds of reforms?

CHINA FINANCIAL - Report 29 Jul 2016 by Michael Pettis

Special points to highlight in this issue:

• The orthodox macroeconomic model, which dominates mainstream thinking about China, implicitly assumes that the main determinant of economic growth is the mix of a country’s assets – not just capital assets but also other, less tangible assets such as the quality of labor and the structure and governance of financial institutions – and the efficiency with which these are managed.
• The balance-sheet approach treats the orthodox model as a special case that may be a useful macroeconomic approximation in a world of low debt, well-structured balance sheets and capital scarcity, but as debt levels, balance sheet distortions and excess capital grow, the orthodox model becomes increasingly irrelevant, and it has been largely irrelevant in China’s case.
• These two different models provide very different reform strategies for China, with the latter implying that the reform strategies proposed by the former are likely to be irrelevant.

Now read on...

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