Thousands of job seekers flock to an employment fair in Hefei, east China's Anhui Province on Feb. 25. A decline in the housing market will create unemployment and depress other economic sectors that hinge on real estate. (STR/AFP/Getty Images)
China’s economy has experienced a recent slowdown that comes as no surprise to economists who have kept the fundamental problems of the country’s macroeconomic policies in sight. China’s economic reform in the late 1970s set up the system in such a way that failure was inevitable.
The two policies at the heart of the Chinese economic model have been the over reliance on investment and exports, supported by artificially low interest rates.
High investment from the Chinese regime and foreign investors in infrastructure and manufacturing capacity has been a major driver of growth in China’s gross domestic product (GDP).
The share of investment as a part of the GDP went from 35.1 percent in 2000 to 48.4 percent in 2011. In contrast, investment in other countries generally declined to a level in the 15 to 29 percent range. To put it simply, in other countries, people are mostly buying and selling things. In China, the government is mostly building things.
The massive investment in China was spurred in part by artificially low interest rates. After accounting for inflation, these rates were at zero or negative. In other words, free money.
That money, obediently supplied by state banks, has been ploughed into infrastructure, real estate, and other big industrial projects. But there are only so many bridges, railways, and one-ton spools of copper that can be put to productive use.