Chinese Growth Prospects in the Short to Medium Term
El-Gamal, Mahmoud A.
The Chinese economy has grown at incredibly fast rates over the past three decades. This growth has been heavily biased in favor of investment-driven, capital-and-resource-intensive, and export-oriented industrialization. Although China has made great strides in improving energy efficiency and reducing the environmental impact of its growth path, continued fast growth is certain to increase demand pressure on fuels and other resources, and to test the limits of environmental sustainability. A very large literature has evolved over the past decade—one extreme praising the Chinese growth model as a new (Beijing consensus) economic paradigm to challenge the Washington consensus, predicting its continuity for the foreseeable future, and the other extreme predicting an imminent collapse. Proponents of the latter approach point to internal and external imbalances of the Chinese growth model (toward investment and trade surpluses, respectively), potential banking crises, and sociopolitical risks emanating from rampant corruption and growing inequalities. Chinese officials have been aware of these three categories of problems, and have promised, at least as early as 2004, to address them. However, imbalances have continued over the past few years, suggesting that gradual transformation away from heavy industry toward employment-creating light manufacturing, which would also contribute to shifting demand from investment to domestic consumption and reduce income inequalities, may be difficult to implement. This “addiction to the Beijing consensus” problem notwithstanding, there is not sufficient evidence to suggest that Chinese internal and external economic imbalances have reached crisis levels. Moreover, the banking sector appears sound, and even if economic slow-down, which is inevitable, uncovers large volumes of nonperforming loans, state domination of banking and the economy, together with massive reserves, would allow for relatively low-cost recapitalization. Sociopolitical risk is very real and appropriately a major concern for Chinese leadership, although the massive size of the country makes an Egyptian- or Tunisian-style revolution highly unlikely.