China’s aggressive stimulus has steadied its big economy faster than many expected. But the Chinese government hasn’t yet delivered the deep structural changes that are needed to keep growth on track after those funds run out.
China’s welcome success in holding up short-term growth could lead it to neglect its long-term challenge, particularly the potential for significant improvements in productivity by further deregulating its hybrid command-market economy. In the cities, hugely profitable businesses are still reserved for state firms, limiting the expansion of the private sector. In the countryside, market overhauls have languished since the 1990s, giving farmers few incentives to invest in their land.
Officials frequently say the financial crisis hasn’t changed China’s fundamental advantages, such as its large domestic market and competitive work force. That may be true, at least until the aging of its population alters the equation. But the global environment in which China operates has changed. Exports supercharged China’s expansion during the past few years, but world-wide trade is shrinking this year for the first time in decades. With U.S. consumers likely to save more for years to come, they no longer will be a bottomless source of demand for Chinese goods.
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