Why China’s Growth is Slowing

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Economists have put forward a number of reasons why China has been slowing. Higher commodities prices and a fast growing economy are causing inflation. The government has moved to reign in China’s lending and credit bubble. Chinese housing prices have started to fall as vacancy rates have skyrocketed. The stock market has dropped. But there could be another reason that few people are talking about.

In this week’s Curious Capitalist column in TIME magazine, Rana Foroohar says another reason China’s long string of economic growth could be coming to an end could because ever since the financial crisis China has been increasingly shifting its resources to state-run firms and clamping down on capitalism.

The post-­financial-crisis conventional wisdom credits China’s success to better policing of the economy: the ring-fenced, state-controlled banking sector was spared the worst financial-­contagion effects. And Beijing was able to prop up growth throughout the global recession with a massive stimulus program focused on infrastructure projects—high-speed rail, new roads and public-­facility upgrades.

But at the same time, support for the private sector, which employs 80% of China’s workers, has been shrinking. Private businesses now get only about 20% of all Chinese bank loans, according to MIT professor Yasheng Huang, author of Capitalism with Chinese Characteristics, even though they are vastly more productive than the state giants that suck up most of the country’s capital.

Subscribers can read the whole column here.