Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

The difficulty of reforming China's economy

By Simon Louie - posted Tuesday, 11 November 2014

Since Deng Xiaoping's reform and opening up in 1978, China's economy has enjoyed 35 years of growth at rates averaging close to 10% per year. However this state directed economic model, in which investment has taken a huge role is nearing the end of its useful life. Since taking office in March 2013, Premier Li Keqiang has sought to enact reforms to rebalance China towards an economy in which consumption and private investment play a greater role. Can Australia have faith in Li's ability to rebalance?

The notion that China's economy needs to be reformed is not new. Wen Jiabao stated in 2007 that China's economy was 'unsustainable, uncoordinated, unbalanced, and unstable'. Despite his words, in the aftermath of falling export orders as a result of the 2008 Great Recession and the 30 million factory layoffs this entailed, the response of China's leadership was not to boldly seize the opportunity to implement much needed reforms. Rather it was to implement a $586 billion stimulus package creating much mal-investment and in effect kicking the can down the road for today's leaders to deal with.

One example of this mal-investment is the Binhai new area in Tianjin, which has been designed as a new financial centre for northern China. Despite there being demand for just 60,000 square metres of office space, 1.57 million square metres are due to be completed by the middle of next year. Evidence that a housing bubble exists in China can be seen in the price to income ratio of Chinese real estate, which is roughly 11:1-this compares to a ratio of close to 6:1 in the US before their housing bubble burst.


President Xi Jinping and Li realise this is fundamentally unsustainable, with Li making the case for reform over stimulus. The policies to reform China's economy involve stopping banks from lending to loss-making State Owned Enterprises (SOEs), allowing interest rates to correctly reflect the market cost of capital, slowly deflating the real estate bubble, speeding up hukou reform and allocating a greater share of the economy to the private sector.

These policy prescriptions are not new, and China's leadership has rightly avoided quick implementation of the above mentioned policies-Russia's quick implementation of shock therapy led to disastrous consequences, something China's leaders want to avoid.

The essential point is that fundamental economic reform - even if done slowly - essentially works at cross-purposes with maintaining a GDP of close to 7%. This presents China's leadership with a massive conundrum from which there may be no good solution.

The CCP's economic reform agenda is sound, but is it politically achievable? Beijing has committed itself to 7% growth to live up to its end of the grand bargain with the Chinese people, but such a target is unrealistic if Xi and Li are serious about structural reforms. For instance, even if the central government were able to gradually deflate China's massive real estate bubble, this would have the effect of lowering property prices. Chinese households have, directly or indirectly (through various wealth management products and the shadow banking sector), placed a vast sum of money into real estate-due to negative real interest rates in the banking sector and a volatile stock market.

There are instances of protests about falling property prices at the offices of real estate agents in Shanghai and Jinan, in the latter case a 25% drop in price. With consumption as a share of GDP already low by world standards (36%), lower real estate prices would have the effect of working against the government's stated aim of raising consumption because of its negative wealth effect. For example, a recent paper by Nouriel Roubini argued that a 10% drop in housing prices could have the effect of reducing consumption's share of GDP by 1%.

Essentially, deflating the real estate bubble even slowly has the effect of making those who have invested feel poorer. In such an instance without government intervention GDP would necessarily fall-but intervention would work against their original goal of rebalancing.


The crux of the problem is that China's leadership wants to rebalance the economy and maintain growth of 7%. Either Xi and Li adhere rigidly to this number or they adopt a much more flexible approach to GDP whilst genuinely implementing reforms.

This means having to undergo a period where growth would be at lower levels before consumption led growth starts to kick in. Every Australian has a stake in whether or not Xi and Li are able to successfully rebalance China's economy.

  1. Pages:
  2. Page 1
  3. All

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

6 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Simon Louie is a freelance defence writer.

Other articles by this Author

All articles by Simon Louie

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 6 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy