Chinese policymakers no longer omnipotent
Martin Wolf takes a hard look at the Chinese transition to a service driven economy from a manufacturing one.
He writes that an unsustainable rise in credit is largely behind the improvement and what is needed is higher consumption and less saving.
"In response to the 2008 financial crisis, China promoted a huge rise in debt-fuelled investment to offset the weakening in external demand. But underlying growth in the economy was slowing. As a result, the "incremental capital output ratio" - the amount of capital needed to generate additional income - has roughly doubled since the early 2000s. China's overall capital-output ratio is also very high and rising. At the margin, much of this investment is likely to be lossmaking. If so, the debt associated with it will also be unsound"
He argues the shift to consumption needs to happen quickly but it's coming at a glacial pace.
He squares the debate but saying the government must either continue to drive inefficient growth via spending or push through painful, short-term reforms. All indications point to more debt.
