 China's soft budget constraint on the demand-side undermines its supply-side structural reformsWing Thye Woo China Economic Review, 2019, vol. 57, issue C Abstract: China's growth rate has been declining every year since 2010, from 10.6% to 6.7% in 2016, and the IMF expects it to drop further, to 5.8% in 2021. Expert opinion on what to do has ranged widely. The optimists view cyclical factors to be the cause of the downturn, and suggest macro-stimulus as the cure. The pessimists identify supply-side distortions to be the cause, and recommends comprehensive structural reform. We argue that the existence of the soft-budget constraint guarantees the creation of excess capacity and zombie firms, and that the correct demand-side supplement to supply-side structural reform should be the termination of the soft-budget constraint and not the implementation of macro-stimulus. Correction of the distortion in the composition and size of investment will render the composition of output to match the composition of consumer demand, and put the economy on a sustainable growth path that is more consumption-oriented. Keywords: Supply-side structural reform; New Normal; Soft-budget constraint; Excess capacity; Zombie firms (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:57:y:2019:i:c:s1043951x1730144x DOI: 10.1016/j.chieco.2017.09.010 Access Statistics for this article China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu More articles in China Economic Review from Elsevier |
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