How did the Chinese miracle occur? (II)

In China, decentralized power makes local leaders the entities who seek development, and local governments become partners for entrepreneurs in breaking through bureaucratic barriers. This makes the approval process much more efficient than in most developed countries.

But as large investment brings up the growth rate, it also causes overcapacity, which, in a normal market environment, inevitably leads to a financial crisis in production. To solve the dilemma, the market has to create more macro demand, naturally calling for the central government's strategic thinking.

The central government backs up national economic growth

The function of Western governments, besides ensuring the rule of law and protection for property, is macroeconomic intervention through financial and monetary policies. But in China, a developing country, the state leadership must take the responsibility for the country's long-term growth while safeguarding social stability.

For this purpose, the Chinese government gradually formed a mechanism to combine long-term strategies and short-term policies, transcending itself from a passive macro-controller or a night watcher as seen in some Western countries in the past.

Without doubt, there have been many mistakes and procedural problems pending solutions, especially in China's industrial policies, short-term macro-adjustment and market intervention. But one should also acknowledge that Beijing has been consistent and resolute in unveiling its strategic plans for economic growth. China's achievements over the past three decades dwarf all other countries, regardless of its form of government.

As for solving the country's overcapacity issue, China's central government chose the right time to join the WTO, defying all difficulties. China's involvement in the global distribution system effectively absorbed the U.S. deficit-backed "super international purchasing power." China's accession to the WTO expanded the market for its products, avoiding the economic crisis cycles of a regular market economy. As a result, the Chinese economy has kept expanding at a rapid speed while showing little fluctuation since 1994, a miracle known to all.

Of China's decade-long growth at an average annual rate of 9.8 percent, around 7 percent has resulted from the regular market economy, and the other 2.5 percent has been from the market economy with Chinese characteristics. Without the 2.5 percent, the Chinese economy would have grown slowly, as in the case of India. In that case, China's GDP in 2012 would not have been 51.9 trillion yuan (US$8.51 trillion), but lower than 25 trillion.

With the high speed growth came high local debts. Whether they are huge risks in China's future development will depend on China's financial structure and function.

Shi Zhengfu is director of Center for New Political Economy, Fudan University and chairman of Comway Capital Group.

The article was translated by Chen Boyuan. Its original unabridged version was published in Chinese.