THE NOT-SO-GREAT WALL: China’s Economic Reforms Have Hit a Wall.

From the late 1970s until 2010 China averaged more than nine percent real growth, but growth has fallen considerably since, coming in at 6.7 percent for all of 2016. More troubling than the country’s dive in growth is its collapse in productivity. All of China’s growth now is achieved through mobilizing more money and labor, not improvements in human capital or technology. It now takes three times as much capital to generate a single unit of economic growth as it did in 2008. The result is an explosion of debt that now accounts for at least 280 percent of GDP, and could break through the 300 percent mark by year’s end.

China has three strategies to arrest this trend. The first is to shrink the size of the old economy by reducing capacity in heavy industrial sectors dominated by lethargic state-owned enterprises, including steel and aluminum. The second is to expand the new economy by supporting high value-added services and advanced technologies. And the third is to reform local government fiscal systems while tightening regulation of new financial instruments such as wealth management products. The headline figures do reflect economic restructuring; services now count for more than half of the economy, high-tech manufacturing is expanding rapidly, and the issuance of new credit is slowing. But despite these efforts, productivity is still flagging.

Two out of those three reforms directly attack the power structure of the Communist Party of China. The remaining one, expanding the high-tech “new economy,” requires the kind of openness and transparency which Communist rule makes impossible.