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China's soft budget constraint on the demand-side undermines its supply-side structural reforms

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  • Woo, Wing Thye

Abstract

China's growth rate has been declining every year since 2010, from 10.6% to 6.7% in 2016, and the IMF expects it to drop further, to 5.8% in 2021. Expert opinion on what to do has ranged widely. The optimists view cyclical factors to be the cause of the downturn, and suggest macro-stimulus as the cure. The pessimists identify supply-side distortions to be the cause, and recommends comprehensive structural reform. We argue that the existence of the soft-budget constraint guarantees the creation of excess capacity and zombie firms, and that the correct demand-side supplement to supply-side structural reform should be the termination of the soft-budget constraint and not the implementation of macro-stimulus. Correction of the distortion in the composition and size of investment will render the composition of output to match the composition of consumer demand, and put the economy on a sustainable growth path that is more consumption-oriented.

Suggested Citation

  • Woo, Wing Thye, 2019. "China's soft budget constraint on the demand-side undermines its supply-side structural reforms," China Economic Review, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:chieco:v:57:y:2019:i:c:s1043951x1730144x
    DOI: 10.1016/j.chieco.2017.09.010
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    Citations

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    Cited by:

    1. Wenfei Xia & Baizhou Li & Shi Yin, 2020. "Identification of Influencing Factors for Sustainable Development: Evaluation and Management of Regional Innovation Performance in Heilongjiang, China," Sustainability, MDPI, vol. 12(7), pages 1-55, March.
    2. Qiao, Lu & Fei, Junjun, 2022. "Government subsidies, enterprise operating efficiency, and “stiff but deathless” zombie firms," Economic Modelling, Elsevier, vol. 107(C).
    3. Jiang, Xiaochen & Shen, Jim Huangnan & Lee, Chien-Chiang & Chen, Chong, 2021. "Supply-side structural reform and dynamic capital structure adjustment: Evidence from Chinese-listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    4. Wu, Changyan & Huang, Xianjin & Chen, Bowen, 2020. "Telecoupling mechanism of urban land expansion based on transportation accessibility: A case study of transitional Yangtze River economic Belt, China," Land Use Policy, Elsevier, vol. 96(C).
    5. Qi, Yajie & Li, Huajiao & Liu, Yanxin & Feng, Sida & Li, Yang & Guo, Sui, 2020. "Granger causality transmission mechanism of steel product prices under multiple scales—The industrial chain perspective," Resources Policy, Elsevier, vol. 67(C).
    6. Deng Ming & Wang Jinbo, 2022. "Why do zombie firms seldom die or resurrect? The effect of government subsidies on the survival duration of China’s zombie firms," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 212-228, January.
    7. Runqun Yu & Zhuoyang Luo, 2023. "Research on the Influence Mechanism of Factor Misallocation on the Transformation Efficiency of Resource-Based Cities Based on the Optimization Direction Function Calculation Method," Sustainability, MDPI, vol. 15(12), pages 1-22, June.
    8. Kunqiang Wang & Li Li & Jun (Justin) Li & Huazheng Chen & Biao He & Long Li, 2022. "An Exploration of Students’ Attitudes Toward Employment Services in Private Schools: The Case of the Sanya Institute of Technology," SAGE Open, , vol. 12(3), pages 21582440221, July.

    More about this item

    Keywords

    Supply-side structural reform; New Normal; Soft-budget constraint; Excess capacity; Zombie firms;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P35 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Public Finance

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