Why China Needs To Implement Reforms Immediately

The Chinese government has been talking about reforms for quite some time. However, it has yet to bite the bullet and according to Michael Pettis, finance professor at Peking University, the time is running out for the government to deliver on its promises. Pettis was on CNBC Monday to discuss why China needs to implement reforms immediately, even at cost of slowing economic growth.

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The New Leadership Is Not Able To Tackle The Slowing Economic Growth

“Well, I think it’s something that we have been seeing for the last couple of years,” Pettis said. “The types of reforms that Beijing needs to implement in order to rebalance the economy and switch its growth models are reforms that are necessarily going to be strongly opposed by the groups that had benefited from the old growth model.”

He continued, “In China, that group is referred to as the vested interests and it’s very important that Beijing is able to centralize power sufficiently [so] that it can implement the reforms in spite of what has been and what will be a strong opposition.”

The Debt Cycle

“This is a story that we have seen in every country that has followed this growth model. They reach a point and we can debate about when – five years ago, 10 years ago – when a lot of investment was being systematically misallocated and when that happens, debt starts to rise much faster than debt servicing capacity and that’s where we still are,” Pettis said.

“Debt is rising much more quickly than debt servicing capacity. So, one of the key challenges that Beijing has to do is it has to implement these reforms before it runs out of debt capacity. And how much time does it have? We don’t really know.”

Pettis continued, “My guess is three to four years, but they certainly don’t have a lot of time. They do have to implement these reforms quickly and as they do we will, we should, expect growth rates to slow significantly.”