Tuesday, May 31, 2016, 3:37 PM CST – China


China needs to overhaul its growth model

China’s investment-driven growth model has reached its limit, and the country’s economic system has become a crisis risk

In June, China’s financial market was struck by a so-called “money shortage,” as the central bank refused to inject cash into struggling State banks. Although the central bank eventually relented, pumping in capital to ease the shortage, the standoff exposed China’s vulnerability to financial crises. But while a bailout from the central bank can solve a short-term liquidity problem, it cannot solve the long-term distortion of the economy, nor can it alter China’s investment-driven growth model.

Although the central government has long been aware of the problems inherent in its growth model, and pledged to “restructure” as early as 1995, the bulk of China’s growth has continued to come from boosting investment. This model has been pushed to the extreme, creating a range of problems including overissuance of paper currency, swollen debt, and macroeconomic instability, all of which have contributed to the current economic slowdown.

In recent years, whenever China has found itself with economic worries, the government has resorted to boosting growth with vast injections of investment, a method dubbed “the Chinese Model.” As an authoritarian government, China is able to mobilize resources to stimulate the economy. Following the global financial crisis, the government unveiled a four trillion yuan (US$652bn) stimulus package and rolled out 10 trillion yuan (US$1.6bn) in loans, helping China to succeed in maintaining a growth rate of 8 percent.

Under the surface, the various problems embedded in this model have become more and more serious, not only in the form of problems like environmental pollution and the over-exploitation of natural resources, but also in the economy itself.

One direct result of the frequent use of stimulus plans is that their effectiveness begins to diminish. For example, the four trillion yuan stimulus package issued in 2009 was only able to buoy up the economy for a year, after which China saw five quarters of continuous economic slowdown.

Since May 2012, many local governments have again been resorting to increasing investment in real estate and industrial projects to ensure GDP growth. In some provinces, annual investment in fixed assets is astonishingly high, reaching 120 percent of GDP in some cases.

Many of these investment projects, aimed at boosting growth rates, now have a very low or even negative return, manifested in the widely reported phenomenon of “ghost towns” – uninhabited real estate developments – in various places around the country. All these efforts only increased the growth rate in the fourth quarter of 2012 by 0.9 percent. In the first quarter of 2013, growth fell again.

As the economy slows down, another problem has become worryingly acute – thanks to massive investment in recent years, as the degree of financial leverage of China’s State-owned enterprises, banks, and local governments reaches dangerous level. With massive debt and poor returns, the financial system has become vulnerable, as insolvency of individual financial institutions can spread to the entire financial system, and lead to a financial crisis. Currently, a major concern is that a stronger US dollar may trigger an exodus of hot money, precipitating a financial crisis similar to the Asian Financial Crisis of the late 1990s.

To solve the problem, it is necessary for China to overhaul the institutional foundations of its investment-driven growth model. At the core of the Chinese model is the existence of authoritarian government, which dictates the distribution of resources. In order to adjust with its growth model, China’s political system is in need of reform. Otherwise, the government could find itself unable to steer away from its current path, even when it eventually realizes that it can no longer depend on stimulus plans to ensure economic growth.

Unfortunately, China’s society and leadership remain divided on some of the basic questions about China’s future, including the issue of what kind of system the country should adopt. It may take a long time before a consensus is reached – in the meantime, China is left to face a looming crisis.

The four trillion yuan (US$652bn) stimulus package issued in 2009 was only able to buoy up the economy for a year, after which China saw five quarters of continuous economic slowdown.

(The author is an economist with the Development and Research Center of the State Council)



Editor's Picks

Sex for Snacks

In cities like Shanghai and Chongqing, a handful of high school…[More]


How Communism’s most controversial theorist finally found an audience – in…[More]

Worked to Death

A growing number of young Chinese white-collar employees are dying of…[More]

What do Chinese People Want?

“I wish I could do what you do.”…[More]


A student of Buddhism with a keen interest in China’s…[More]

Prize Fighter

Elevated into the State-approved pantheon of great Chinese writers thanks to…[More]


China’s indigenous honey bee is under threat from both environmental…[More]

Dams in Distress

In 1975, over 60 dams collapsed after a rainstorm in Zhumadian city, Henan…[More]

The New Class

China’s growing online education market has attracted the attention of…[More]

Exam Boot Camp

A middle school in Anhui province has earned a reputation for…[More]

From Stall to Mall

Taobao’s shift towards a business-to-consumer model has come at a…[More]

Pathologically Politicized

Practitioners at all levels concur that “messy” is the word that…[More]

In Whose Court?

The failure of the country’s administrative litigation system has prompted…[More]

Tradition on Trial

After Confucianism made the maintenance of inequality between the sexes fundamental…[More]

Inevitable Brutality

The vicious murder of a doctor in a Zhejiang hospital shows…[More]

Graft Breeds Graft

The gap between the investigation and prosecution of official corruption cases…[More]


A 74-year-old man surnamed Xie from Shenyang, Liaoning Province was duped out of 420,000 yuan (US$69,342), despite bank employees’ efforts to…[More]

Who Cares?

A new law decrees that all Chinese citizens are now obliged…[More]


A policeman pulled his gun to dissuade villagers from stealing oranges…[More]

Problem Solved?

Former Politburo member Bo Xilai’s public trial sends mixed messages…[More]

Progress or Pornography?

A new sex education primer aimed at elementary school-age children has…[More]

An Avoidable Tragedy

Poor city planning and lax safety regulations turned a minor gas…[More]

Mean Streets

The chengguan system has become the most visible symptom of a…[More]

Saving Nature

The concept of animal welfare is yet to be widely acknowledged…[More]

Back in Action

After stagnating for 10 years, China’s SOE reform has fired up…[More]


Wang Xun, an archeologist with Peking University, arranged the bones of…[More]


The hanging coffins of the Bo people, a Chinese ethnic minority…[More]

How do Chinese people live?

So, the bottom line is that Beijing is an expensive place.…[More]

Trust Trip

Embarking on a three-month car journey around China without handing over…[More]

Fading Lights

For those who grew up under the bright lights of China…[More]