In a previous blog, I discussed China’s policy of reducing growth expectations in order to improve the ‘quality’ of economic development. This policy makes sense for reasons discussed in my last blog; even though the Chinese premier Li Keqiang announced that the growth target is ‘around 7%’, it looks like China will struggle to meet such target.
Today, China’s economy is haunted by the ghost of the global financial crisis of 2008. The country is caught in a vicious cycle of overhang debt, overproduction and reduced consumption levels (Fortune). In 2008, as the government desperately aimed to rekindle growth, it implemented policies of investment-led economic expansion; today, such past policies have taken the Chinese economy very close to a breaking-point. In 2008, China’s debt-to-GDP ratio was around 150%. Recent estimates suggest that today, the figure is 282%, the highest among all emerging-market economies (Fortune). Unable to pay back the exorbitant loans they received, many entrepreneurs have left gigantic projects unfinished.
Under this circumstances, it became evident that the problem is not lack of opportunities, but lack of consumption. Thus, the Chinese government should focus on policies that encourage consumer spending, while discouraging investors from continuing to increase their already high debt. Nevertheless, due the interests of the political party in power, the problem of social tension in China (which greatly contributes to the reduced consumption levels) remains to be repressed and unattended. It will be interesting to see who the story unfolds, but so far, it looks like the crash of the Chinese economy is imminent.