Council on Foreign Relations Global Economics Monthly
Issue 14 | July 2014

Global Economics Monthly

China: The Long and Short of Economic Reform

Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics

Bottom Line: China looks on track to meet this year's growth target, but at the cost of delayed reform and growing imbalances. Should markets care?

Recent news on the Chinese economy is good: Premier Li Keqiang signaled that the second quarter improved on the 7.4 percent growth in the first quarter of 2014, even as he warned of a possible future slowdown, and the government remains confident that it will achieve its 7.5 percent growth target this year. Although gross domestic product (GDP) is far from a perfect measure of economic activity in China—in fact Beijing has been trying to downplay its importance for markets—other indicators of activity, such as manufacturing, exports, and use of raw materials, similarly show an economy that has been resilient to domestic and external shocks. Put aside questions about the accuracy of official statistics and the economy's forward momentum, easy credit conditions and the capacity of policymakers to provide additional stimulus all point to the target being met. Most private forecasters agree.

Though the markets are appropriately buoyed by the notion of a resilient Chinese economy, there are a number of reasons for concern over the next decade. In recent years, and notably since the Great Recession, extraordinarily high and rising levels of investment fueled by easy credit and a free-spending government have been the primary driver of Chinese growth. As a share of the economy, Chinese investment in 2013 rose to about 50 percent of GDP, more than double that of industrial countries and well in excess of other major emerging markets. This investment overshooting reflects a range of distortive policies at both local and central government levels, and has resulted in rising bad debts and massive excess capacity in real estate, construction, and manufacturing. These imbalances continue to build, and though the government has large financial buffers to address any future crisis, the scale of the adjustment that will ultimately be needed grows with each passing year.

Figure 1: Softlanding for the Chinese Economy?

Source: Organization for Economic Cooperation and Development (OECD) Statistical Database Read more »

Looking Ahead: Kahn's take on the news on the horizon

Summer Volatility

In the United States, Federal Reserve Chair Janet Yellen has sought to calm markets, but some market participants are moving forward expectations of the first Fed rate hike in 2015, which could contribute to market volatility in thin summer markets.

Courtroom Drama

Argentina faces an end-month deadline for reaching a deal with holdout creditors following an adverse U.S. court ruling. Markets are holding steady on hopes of a deal, but a default looks increasingly likely.

Assistance for Ukraine

The IMF looks set to approve another disbursement to Ukraine, but sharply rising financing needs will force a fundamental reassessment of the program in coming months.

From the Macro and Markets Blog

Argentina Wins/Loses

Robert Kahn

The U.S. Supreme Court's rejection of Argentina's appeal could change the rules of the game for future soverign debt restructurings. Read more »

Ukraine: Now Comes the Hard Part

Robert Kahn

After a successful election, the new president of Ukraine will have to move quickly to address economic woes and clean up after decades of failed policy. Read more »

Russian Contagion, Geopolitical Risk, and Markets

Robert Kahn

Why haven't markets reacted more to already-imposed sanctions? And what are the implications of such underreaction for further sanctions? Read more »

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