Zhang Bin, Director of the Global Macroeconomics Research Division of the Chinese Academy of Social Sciences, begins this Paulson Policy Memorandum by noting that, despite Beijing’s efforts, there is no sign of a V-shaped economic recovery in China today. On the contrary, the Chinese economy seems more unsustainable than ever and is also vulnerable to crisis. For example, from 2001 to 2007, there had been almost no increase in China’s debt to GDP ratio. From 2007 to 2015, however, this ratio rose from 172 percent to more than 250 percent. And the large proportion of corporate sector debt together with a rapid increase in debt levels nationwide have yielded widespread concern about the potential for a financial crisis.
But Zhang then offers a non-conventional perspective on China’s economic slowdown. His memorandum argues that both the general slowdown of China’s economic growth and the stagnation of its industrial sector are the natural consequence of China’s new status as a middle-income country. The experience of advanced economies, Zhang says, has shown that services play a more prominent role in the economy once per capita income reaches a certain level. And since productivity growth is generally lower in service-related sectors, such an economy will inevitably slow down as these sectors become engines of growth.
Zhang makes two other arguments as well: Many barriers and bottlenecks to the development of services in China remain, he says, and these obstacles are further slowing down the economy. What is more, instead of tackling these barriers, Beijing has devoted most of its attention and resources to helping the industrial sector, not services.
His underlying argument is that since the relative decline of China’s industrial sectors will be a natural consequence of continued economic development, such attempts by the government to fight this trend will unavoidably lead to distortions. That is why, for example, Beijing’s efforts to stimulate the industrial sector have resulted in low-efficiency investment and overcapacity even as credit and debt have expanded out of control.
Zhang’s memorandum builds out these arguments in four parts: First, he offers a review of the transition toward a services economy, including the mechanisms behind the rise of service-related sectors and the decline of manufacturing once a country’s per capita income reaches a certain level. Second, Zhang discusses problems and issues that have hindered China’s transition to a services economy. Third, he reviews recent government economic stimulus efforts, arguing that these stimulus programs have actually complicated and delayed China’s transition toward a services-oriented economy. Finally, he provides some policy prescriptions aimed at facilitating the transition process and making China’s economic growth more sustainable in the long run.