Lending Will Not Help China GDP Decline

China’s economic slowdown began in 2011, when GDP growth rate in the fourth quarter fell under 9% for the first time within a decade.

gdp-chinaThe slowdown extended to 2012 and GDP growth rate reached a record low of 7.4% in the third quarter, followed by a mild pick-up to 7.9% in the fourth quarter. Against all the optimistic predictions about a significant rebound in GDP growth by western economists, recent official statistics show that GDP growth rate of the first quarter in 2013 recorded a disappointing 7.7%.

A tremendous stimulus package has been introduced by the authority to reverse the downward trend of GDP growth. During the past six months, a total of $1.6 trillion has been pumped into the economy as new credit to stimulate investment, risking exacerbating the already over-heated real estate market.

But it turns out that the huge credit expansion not only fails to boost up China’s economic growth—as shown by the moderate slide of GDP growth in the first quarter this year—but also threatens to destabilize China’s whole financial system since most of the credit transactions were conducted through opaque shadow banks.

As China approaching the status of a middle-income economy, the “always works well” credit stimulus is losing its magic power. The export-oriented growth model with heavy dependence on cheap labor puts China in a disadvantage as it enters the middle-income era. Furthermore, the global financial crisis greatly dampened consumption in western countries, which in turn dealt a severe blow to China’s export volume.

The current domestic and global economic environment indicates that the old export fetishism can no longer support a sustainable economic development in China during the post-financial-crisis period

Thus, instead of another credit-fueled investment boom, what China really needs now is a more domestic consumption-based economy by reducing income inequality, improving public welfare, encouraging innovation and creativity.

However, our undue emphasis on GDP growth rate has led us to give the wrong solution that will mess up the financial system. Instead of taking effective measures to improve education and reduce inequality, we pin our hope on fueling economic growth with risky credit explosion, and after it failed to bring out a GDP spring, we just gave it another try.

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Massive amounts of credits are given out every day by reckless shadow banks who have little concern about the trustworthiness of borrowers. This exacerbates over-capacity, over-investment and other problems that have already burdened our economy, and defaults made by loss-making companies are leading to the built-up of a large number of bad loans. The risky combination serves as a warning that a myopic credit splurge is putting China in great danger of an economic crisis.

When future historians look back, there may be two scenarios of China’s economic development track: one is that by reining in credit, reducing income inequality and rationalizing economic structure, we overcame the “middle-income trap” and maintained sustainable economic growth.

The other is that an imprudent credit expansion driven by our obsession with a double-digit GDP growth led to a bubble collapse and drove China’s economy into a long-period of depression. If no action is taken, it will be only a matter of time before the second scenario becomes a reality, and by that time we will regret it.

For more information, please see:

Official website of National Bureau of Statistics of China http://www.stats.gov.cn/english/pressrelease/

“China’s economic slowdown is bigger danger than its growth” Bloomberg News, Jan 19, 2013 http://www.silive.com/opinion/columns/index.ssf/2013/01/chinas_economic_slowdown_is_bi.html

“How fast is China’s slowdown coming and what should Beijing do about it?” ChinaFile, Apr 18,2013

Tammy Tang is a MA candidate in International Relations at New York University. Her research concentrates on the Asia Pacific and US-China relations. She is now interning at Asia Society – a leading non-profit organization for promoting cultural exchange between the US and Asian countries. Before attending NYU, Tammy received a BA in English at Nanjing Normal University, China. She wants to pursue a career in media communication and journalism after graduation. Read other articles by Tammy.