The Causes of China’s Current Economic Difficulty and Its Solution

This study investigates the causes of China’s current economic difficulty. After four decades of rapid development, the Chinese economy faces slow growth, a high debt burden, and a real estate crisis. China’s current economic difficulty has two root causes: interest rate-control-induced overinvestment and restrictions on entry to many sectors. The former has produced overcapacity and low labor income such that economic growth depends heavily on exports and new investment; the latter has blocked competition-led efficiency gains in those sectors, which might generate additional economic growth. Since overcapacity has reduced returns to capital and profit margins and firms cannot increase employees’ wages, the first measure to address the current difficulty is to raise social welfare provisions in education, health care, and pensions to encourage consumption and reduce saving. The second measure is to open the monopolized or highly restricted sectors to privately owned enterprises to exploit the productivity gains from competitive markets.