Sustaining China's Economic Growth after the Global Financial Crisis
Nicholas R. Lardy
Washington: Peterson Institute for International Economics, 2012, 181 pp.
As one of the world's leading experts on China's economic reforms, Nick Lardy has produced two earlier books that have become keys to understanding the challenges China faces in making the transition to a market economy and becoming a full-pledged member of the global liberal economic order. His 1998 volume on China's Unfinished Economic Revolution and his 2002 text on Integrating China into the Global Economy were both published by the Brookings Institution, where he was a senior fellow from 1995 until 2003, at which time he joined the Peterson Institute for International Economics, where he is now Anthony M. Solomon Senior Fellow.
Lardy's new book completes a trilogy by examining China's response to the global financial crisis of 2008-09, and the policy changes that still need to be implemented to sustain future growth. The basic thesis is that fundamental reforms need to be undertaken to rid China's economy of the serious distortions inherent in the present growth model.
The influence of the state in controlling key prices--notably interest rates; the exchange rate; and prices for refined energy products, water, and electricity--politicizes investment decisions, artificially spurs export-led growth, and favors manufacturing.
China's challenge is to expand the scope of private markets and use competitive pricing to allocate resources efficiently. Once prices are right, China's growth path can be rebalanced toward greater domestie consumption.
President Hu Jintao wants to build a "harmonious society" by creating a more extensive growth model that spreads growth to less developed regions and by decreasing income inequality. Yet, as Lardy notes, present leaders have not done much to extend liberalization in the post-Deng Xiaoping era. Modest reforms are not sufficient to free interest rates and other key prices from the hand of the state. The new leadership team that is soon to take over will need to take bolder steps if China is to end financial repression and extend prosperity. Lardy carefully explains the necessary reforms and the obstacles that need to be overcome.
The book consists of five chapters: (1) "China's Response to the Global Crisis," (2) "Imbalances and Their Implications for China's Economy," (3) "Policies for Rebalancing Economic Growth," (4) "China and the Global Economic Rebalancing," and (.5) "The Politics of Economic Rebalancing." There is 'also a brief appendix explaining some of the problems with the official data, especially the understatement of the size of the service sector and the underestimation of household consumption because of the mismeasurement of housing services. Those problems are being addressed, but there is no doubt that without true market prices, a rule of law, and greater transparency many experts will want to scrutinize official pronouncements.
Chapter 1 discusses China's massive RMB4 trillion ($586 billion) stimulus program launched in 2008 to counter the global financial crisis. Monetary easing and infrastructure investment, financed primarily by loans from state-owned banks, helped keep real GDP growing by more than 9 percent in 2009 and more than 10 percent in 9.010, while the United States, Europe, and Japan languished. Critics of that program, such as MIT economist Huang Yasheng, argue that state intervention during the crisis has set back the reform effort and harmed the private sector. In particular, it is elaimed that the bulk of bank loans went to state-owned enterprises (SOEs).
Lardy does not accept that verdict. Relying on official data, he concludes that "the stimulus program did not lead to a wholesale advance of the state at the expense of either private firms or individual businesses." In particular, "state-owned firms did not increase their share of bank lending" (p. 40). Nevertheless, he recognizes that the state continues to retain control over the so-called pillar industries such as banking, finance, telecommunications, and petroleum. He does acknowledge the "stepped-up level of state industrial policy," but thinks it is premature to predict the impact on "the balance between state and market" (p. 41).
The question of balanced growth and the split between state and market could be explored in more depth. It is clear that Lardy favors a less intrusive...