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Business News/ Opinion / The hole China finds itself in
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The hole China finds itself in

The hole China finds itself in

Illustration: Jayachandran / MintPremium

Illustration: Jayachandran / Mint

It’s a little hard to dig oneself out of the hole one has spent decades digging in the first place. China’s about to find out just how hard it is, as it re-examines the effects of the industrial policies that won it such handsome growth figures.

At least China is trying. On Monday, the country’s government released guidelines on how it would curb overcapacity in steel, cement, flat glass, coal, chemicals, polysilicon and wind power equipment. Economists have been warning for some time of the dangers of excess industrial investment. Finally, earlier this month, the government started making noises about reducing the oversupply in steel, as also slowing bank lending.

In the last month, world leaders have emphasized the need to correct “global imbalances". Due to its savings glut, China is one half of the imbalance—the other half being the US economy—that needs urgent reform.

Illustration: Jayachandran / Mint

But the leaders have only themselves to blame. Industrial policies that chased high growth—an undervalued exchange rate, very low interest rates, irresponsible lending, subsidies for manufacturing—ignored household income or consumption. This model of growth, much vaunted earlier this decade, sacrificed a balanced economy at the altar of high investment and exports.

And this model won’t be reformed overnight. The attempt to resuscitate the economy through a $586 billion stimulus in November only exacerbated problems: More money was funnelled into investment and real estate. Banking regulators have been trying to slow lending since July, but yuan loans in September outpaced those in August. Metal imports in September showed a sharp growth.

Part of the problem is political. Even if the central government in Beijing wants to check investment, implementation depends on local Communist Party officials—whose survival is tied to the number of units the local factory produces. And the state’s iron control over banking and large parts of the economy makes any rebalancing difficult.

Let’s forget that Beijing is far from willing to reform its political system. It also refuses to let its currency appreciate further. Unless these fundamental problems are addressed, China will continue to stare into the abyss of the hole it has dug.

Can China successfully rebalance its economy? Tell us at views@livemint.com

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Published: 19 Oct 2009, 08:36 PM IST
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