Monday 15 October 2012

“POLICY PARALYSIS” IN CHINA

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WHY CHINA IS SITTING ON ITS HANDS

Yiping Huang

Business Spectator, October 15, 2012

Growth of Chinese GDP decelerated to 7.8 per cent in the first half of 2012 from 9.6 per cent a year ago.

But the government has remained relatively calm, taking only measured steps to stabilise growth. This so-called ‘policy paralysis’ does appear odd given the Chinese government’s emphasis of GDP growth in the past. Some market participants argue that the policy makers are ‘way behind the curve’ because of the once-a-decade leadership transition.

It is unlikely the Chinese government is simply ignoring the growth risks. A more plausible explanation is the underlying view among officials that the current growth downturn is as much structural in nature as cyclical. According to our estimation, the economy’s potential growth rate has already moderated, from 10 per cent in 2000-10 to an estimated 8 per cent over 2010-20, and will slow further to 6 per cent over 2020-30. If these figures are roughly correct, then the 7 to 8 per cent range may have become the ‘new normal’ of Chinese growth. In any case, the government has already revised down its GDP growth target to 7.5 per cent in 2012, from 8 per cent in previous years, and may further take it down to 7 per cent in 2013.

The seeming reluctance of policy makers to adopt aggressive policy responses this time round is, at least in part, due to lessons learned from the 2008 stimulus package. For the past several years, the government’s massive investment programs have been criticised for increasing financial and fiscal risks. Many government officials speak regularly about the need to tolerate slow growth in order to improve growth sustainability. They emphasise the policy objective of stabilising, rather than boosting, growth in the face of increasing downside risks to the economy.

(...) [article here]

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