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Global Perspectives
 

Yao Yang: China's Growing Growth Risks

Published on Feb 29, 2012 10:42 AM
 

BEIJING - If everything goes right for China, it will surpass the United States as the world's largest economy, in current dollar terms (and more quickly in real terms), by 2021. Its per capita income will reach that of today's lower tier of high-income countries. But, despite its forward momentum, the Chinese economy faces looming risks in the coming decade.

The immediate risk is continuing stagnation, or recession, in Europe. In the last decade, export growth has accounted for roughly one-third of China's overall economic growth, and about one-third of Chinese exports went to the European Union. If the situation in Europe continues to deteriorate, China's growth will be dragged down.

Over-tightening of domestic macroeconomic policies, especially those aimed at the real-estate market, could heighten the risk of a slowdown, with house prices currently falling across China, owing to stringent government measures. Indeed, the situation is much like that of the 1997 Asian financial crisis. In the several years before that crisis hit, China had been combating inflation, and appeared to be headed for a soft landing. But the combination of crisis and austerity condemned China to several years of deflation and considerably slower growth.

Today, as China looks to the medium term, the government must face the problems created by its pervasive role in the economy. A new World Bank report singles out lack of reform of state-owned enterprises as the most important impediment to the country's economic growth. But that is only a symptom of a deeper problem: the government's dominant role in economic affairs.

 
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