The Chinese Economy Is in Need of Reform

“Slowing economic growth shows that China should turn away from it’s model of investment-fueled growth,” said Ken Goldstein, a leading economist at the Conference Board at a press conference on Tuesday. He emphasized the need for China to build domestic consumption in order to ensure future economic growth.

Poor economic data coming from China have revealed deep cracks in its economy after it recorded lofty growth rates of 11% back in 2009 and 2010.

Recently slumping industrial production rate and sharp sell-offs in Chinese equities have caused much consternation among foreign investors, who are worried that slowing economic growth is causing ripple effects on the global economy.

The Shanghai Composite has already fallen 35% from its highs earlier back in the year, and South East Asian countries running high on China’s insatiable demand for commodities have been hit hard.

Official figures for economic growth remained as high as 7.3% back in 2014. Goldstein, however, pointed out that economic indicators released from Beijing have a tendency to be wildly optimistic and suggested official figures were unreliable.

“Chinese officials needed to get used to the idea of lower rates of growth,” said Goldstein. Chinese officials benefiting from the status quo are resisting attempts to reform inefficient state–owned enterprises. And the party leadership remains reluctant to handle the keys to China’s economy to the private sector. Another issue was that the central government found it difficult to fight back against rampant corruption.

China should rely more on its “own internal market,” he said, as opposed to massive sums of investment it as it did after the global financial crisis in 2008.

World Bank data shows that since 1975, China has spent an average of over 40% of its GDP annually on domestic capital formation. This figure for the United States for the same period was just below 23%. This massive investment in infrastructure, manufacturing, real estate and other capital-intensive projects drove China’s economic growth rate to double digits.

But what worked before no longer works now, said Goldstein. Forty years on, good money has been thrown over bad as Chinese consumers show either little interest or lack of ability to actually buy the goods and services produced by the country. Ghost towns like Ordos in Inner Mongolia and growing stockpiles of unsold cars are prime examples of this disconnect.

Xi Jin Ping, the Chinese President, is under pressure to reverse the sagging fortunes of the Chinese economy. With an increasing amount of migrants moving from the countryside to cities, government officials worry that urban areas do not have enough jobs for the arriving mass of migrants. “The last thing the Chinese Communist Party needs is another Tianamen Square,” said Goldstein.