This interactive graphic delves into China’s growth and debt dynamics to show the reform challenges the country faces in securing a sustainable path.
The first four charts show two International Monetary Fund (IMF) potential scenarios. The “reform scenario” (green line) is based on the IMF’s central forecast of improving credit efficiency, stabilizing debt and a gradual moderation in growth – a big change from current trends. The blue line is based on the IMF’s “no reform” scenario. You can create your own scenario to by dragging the orange line markers. The five charts below show the impact your changes have on various output metrics. .
What stands out is how China’s debt-driven investment boom appears to waste capital. The deterioration began with the stimulus injected into the economy in 2009 to limit the damage from the global financial crisis. Since then, the second and third bottom charts show an ever-declining impact of investment and credit on GDP growth. The different potential outcomes for credit and investment efficiency in the IMF’s or your own scenario quantify China’s reform challenge. The reform scenario would require a big restructuring of the economy: a hypothetical 3 percentage point shift of GDP to consumption from investment, a slowing of debt growth from over 15% today to eventually growing in line with nominal GDP near 8% – with all other variables held constant. Ultimately, this means stropping to throw money at an increasingly inefficient capital stock.
More efficient capital investment – what supply-side reforms should achieve – is a critical part of the equation. Also implicit in this scenario is an improvement in productivity growth to help GDP growth stay near a 6% annual rate. If China fails to reform, the greater use of debt to stoke growth in already bloated sectors would lead to an even greater deterioration in investment and credit efficiency, thereby causing GDP growth to slow sharply. The crux of the problem? Achieving these tricky reforms while still maintaining a level of economic growth and higher incomes to deliver on promised prosperity. It is a balancing act.
Historical source: International Monetary Fund, National Bureau of Statistics China.
No reform scenario: Held constant to reflect no reforms that would change the share.
Reform scenario: Based on IMF Article IV baseline out to 2021, extrapolating the fall in share proportionately to 2025.