With the economy slowing down for five years, it becomes difficult for the Chinese authorities to preserve their good track record. Growth maximisation is no longer the highest goal. As a result of excessive lending and investment growth, the financial system has become vulnerable. The focus has shifted to more efficient and balanced growth, or at least that is the party line. Ageing and a shrinking working population make the current growth model unsustainable. Rapid urbanisation and industrialisation have led to an unprecedented increase in prosperity, but at the same time have affected the living environment dramatically. These problems require a different approach. Policy solutions of the past are no longer suitable.

Panic is a big word, but sometimes it seems that the Chinese government does not know how to manage the economic slowdown properly. The risk of wrong choices is high, for example, keeping the credit and investment growth too high for a long period of time, so that the pressure on the financial system will continue to increase. Another example is maintaining loss-making steel, iron ore or coal industries, which face severe overcapacity, for too long, making the financial risks for banks and local authorities simply untenable and making China’s air pollution even worse.

The Chinese economy and its policymakers have reached a critical point. Only drastic stimulus measures can put a halt to the slowdown. The consequences of more credit-driven growth will ultimately be large, leading to defaults and possibly a banking crisis. Yet the government seems to prefer to follow this uncertain path to suffering some setbacks in the short term.

The sharp increase in Chinese stock markets in recent months demonstrates that citizen confidence in the Chinese government is not at issue. Prices soar with every indication that there are more stimulus measures to come. While foreign investors exit the market, Chinese investors seem to ignore the risks that are bigger by the day. A government that loses control over the economy and makes major policy mistakes is simply not part of the Chinese collective memory.


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