China’s growth over the past couple of decades was based on large increases in government-directed investment. As a consequence, it had to run large trade surpluses to absorb the resulting excess capacity in manufacturing……. This can’t continue.
~ By Michael Pettis – WSJ.com
As Japan and other fast-growing economies in the past have discovered, continued infrastructure spending grows increasingly wasteful and fails to deliver further growth. Subsidizing business through artificially low interest rates may encourage private investment as an alternative, but leads to:
- bloated, inefficient corporations;
- high inflation; and
- massive speculative bubbles.
Options are narrowing and a shift to private consumption as the main driver of future growth is not without its risks:
- low interest rates and high inflation are eroding private savings;
- higher interest rates, however, would unmask business inefficiencies and collapse the speculative property bubble;
- higher wages, on the other hand, will fuel inflation.
This Chinese puzzle may not be easy to solve.