The Chinese economy continues to slow as the government attempts to shift from investment-led to consumption- and services-driven growth. After reaching double-digit rates in 2010, economic growth has been on a downward trend and is now at its slowest pace since the global downturn at 6.7%. Given that China is the second-largest economy and largest exporter in the world, the slowdown has raised concerns; a hard landing for China would have serious international implications.
Although it might seem like a better idea to begin with more aggressive structural reforms and make progress on the economic transition rather than continuing with unsustainable means of growth and postponing an inevitable slowdown, it appears the Chinese government is choosing the latter and prioritizing its growth target over restructuring. This is evident from the fact that the government has eased its policy stance by cutting interest rates five times during the course of a year. Housing restrictions have also been eased while government infrastructure spending and investment by state-owned enterprises have risen.
Unfortunately, relying on investment-driven growth to temporarily lift growth has serious long run consequences. China’s debt has risen at a rapid rate over the last few years and has now reached 250% of GDP. Historically, every major economy that has experienced such increases in debt inevitably suffered either a financial crisis or major slowdown. As such, relying on the same means of growth to ensure its growth target will only worsen China’s debt problem and put the country at higher risk of a serious financial crisis and significant economic slowdown after 2020. Therefore, by avoiding a slight slowdown in the near term, the government is increasing the likelihood of a more severe slowdown in the long-run.