China Continues to Slow

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President Xi Jinping will begin the final year of his first term in 2017, and the challenges he faces managing the world’s second largest economy are manifold. China’s government is aiming for growth rates of 6.5% over the next five years, but recent experience has shown that reaching or even exceeding these goals will not lead to a stable Chinese economy unless those targets are hit in a sustainable manner.

Since the financial crisis, policymakers have propped up growth by supporting the corporate sector with cheap credit to invest in infrastructure and China’s formidable export sector. But that credit has been increasingly funnelled into less productive investments, leading overall debt to soar. According to a recent analysis by the International Monetary Fund, “overall credit growth has been averaging around 20% per year, much higher than nominal GDP growth.” That’s not a sustainable strategy for future economic growth, and President Xi must do more to rebalance the economy towards consumer spending in the coming year if the Chinese economy is going to continue to power global growth going forward.