Tuesday, August 17, 2010

All is not yet well for China's economy - Wang Jianmao

Wang JianmaoWang Jianmao Fantake via Flickr
Economic growth seems to be on track and China has passed Japan as the second largest economy in the world, still stiff measures from the government are needed to avoid a second dip, warns CEIBS economy professor Wang Jianmao in CIB-magazine.
Historical statistics on economic growth have been quietly adjusted again, suggesting  the economy was severely overheated just before the global financial crisis took off, showing a seriously overheated economy, writes Wang Jianmao.
The best scenario of proactive adjustment is a U-shaped process of maintaining a moderate growth rate of 7-8% during 2010-2012 and then returning to the potential growth rate of about 9% in 2013. The worst scenario of reactive adjustment is a W-shaped process of propping up double-digit growth until 2012 and then unavoidably diving for a second dip below 5% or even 4%. 
The decision-makers in China should remember the lessons of reactive adjustment and hard landings of the past. China's economy experienced full-blown overheating during 1984 and 1985, with actual growth rate significantly higher than the potential one. After attempts at cooling the economy, the growth rate dropped to 8.8% in 1986, down from 13.5% in 1985, which was similar to the recent shrink in the growth rate from 14.4% in 2007 to 10.2% in 2008 and to 9.1% in 2009. However, the adjustment efforts taken then were not seen through to the end, causing the growth rate to rebound to 11.6% in 1987 and 11.3% in 1988. Then, a second dip became unavoidable and China eventually plunged into a hard landing with a growth rate as low as 4.1% in 1989 and 3.8% in 1990. 
Since China plays a prominent role in the global economy, a second dip of the Chinese economy would mean a second dip for the world. Therefore, a "slow" U-shaped recovery of the Chinese economy should be interpreted as a positive sign indicating that China is moving along the right path. A quick V-shaped recovery is only possible for those countries not severely burdened by flawed development models. Unfortunately China does not belong to this group.
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Professor Wang Jianmao is a speaker at the China Speakers Bureau. Do you need him at your conference or meeting? Do get in touch.
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