Why China needs to invest more in infrastructure to boost growth
Yu Yongding says while Beijing is right to focus on supply-side reforms and tackle overcapacity, demand-side solutions – such as prudent infrastructure investment – should be part of its economic strategy, too
And, last November, they officially placed the blame on long-term supply-side shortcomings, which they pledged to address with far-reaching structural reforms.
Xi Jinping’s supply-side plan now the genuine article of economic reform for China
But, although Chinese officials should be applauded for their commitment to implementing painful – and badly needed – structural reforms, the supply-side focus largely ignores the present. China faces two separate challenges: the long-term issue of a declining potential growth rate and the immediate problem of below-potential actual growth.
Contrary to popular belief, supply-side reform will not boost China’s actual growth rate today
Among the long-term factors undermining potential growth are diminishing returns to scale, a widening income gap, and a narrowing scope for technological catch-up through imitation.
Moreover, even as the country’s demographic dividend dissolves, its carrying capacity (the size of the population that the environment can sustain) is being exhausted – a situation that high levels of pollution are certainly not helping. Finally, and most important, the country is suffering from inadequate progress on market-oriented reform.
While some of these factors are irreversible, others can be addressed effectively. And, indeed, the government’s supply-side reform strategy will go a long way towards doing just that, ultimately stabilising and even raising China’s growth potential. But, contrary to popular belief, they will not boost China’s actual growth rate today.
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