China

24/07/13

China’s End of Exuberance by Michael Spence - Project Syndicate

China’s End of Exuberance

23 July 2013 MILAN – China’s growth has slowed considerably since 2010, and it may slow even more – a prospect that is rattling investors and markets well beyond China’s borders. With many of the global economy’s traditional growth engines – like the United States – stuck in low gear, China’s performance has become increasingly important. But now growth rates for Chinese exports and related indices in manufacturing have fallen, largely owing to weak external demand, especially in Europe. And the Chinese authorities are now scaling back the other major driver of their country’s growth, public-sector investment, as low-return projects seem to generate aggregate demand but prove unsustainable fairly quickly. The government is using a variety of instruments, including financial-sector credit discipline, to rein in investment demand. Essentially, the government guarantee associated with financing public-sector investment is being withdrawn – as it should be. But, to circumvent the restrictions in the state-dominated financial system, a shadow banking system has developed, raising new risks: economic distortions; reliance on excess leverage to drive growth in the consumer, real estate, corporate, and

Michael Spence

Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, and Academic Board Chairman of the Fung Global Institute in Hong Kong. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth.

government sectors; and dangers associated with inadequate regulation. As a result, investors are worried that China could slip into the excess-leverage growth model that has...