China's Economy: Soft or Hard Landing?

A significant slowdown in China's economic growth in the third quarter is posing daunting challenges to the government's macro-control policies.

Pushing structural reform

The government's policy adjustment will determine whether China can prevent an economic slowdown from evolving into a meltdown.
China should transform its economy from an export-driven to consumption-driven growth model and from one that relies on highly polluting and energy-consuming heavy industries to one that depends on the hi-tech and service industries.

The cyclical fall in commodity prices offers the best timing for China's energy price reform as well as for increasing its energy efficiency. (Currently, the government decides most of the energy prices; hence cost fluctuations cannot be reflected in the final sales price.) In the 1960s-70s, Japan, Germany, and Latin American countries such as Mexico and Argentina boasted the highest economic growth in the world. But four decades later, the first two edged into developed countries, while Latin American countries are still lingering in the domain of developing countries. This is because they adopted completely different development models after being punched by high oil prices in the 1970s. Japan and Germany adopted favorable policies to encourage innovation in energy efficiency projects, and their energy efficiency levels have doubled in the past 30 years. But developing countries tried to stimulate economic growth by offering subsidies and price caps on energy. At present, the energy problem has increasingly become a bottleneck restricting developing countries' development. China should avoid the Latin American pattern and embark upon a project to refurbish its national energy policies to develop its economy in a more effective way.

Moreover, China should perfect its social security system in a bid to boost domestic consumption. High household deposit rates and low consumer consumption are partly caused by the lack of a sufficient social security system. China's expenditures for social security are far less than the average spent by developed countries. Therefore, its citizens tend to save as much money as possible for their retirement and possible illnesses, thus leading to inefficient consumption. The government should invest heavily in social security, public health and education to reassure its people that it is safe to spend money now.

Apart from the above-mentioned suggestions, the government should continue its land reform program to improve farmers' income, speed up urbanization and enhance intellectual property rights protection to promote innovation.