Government guarantees, reforms and growth in China

Comments on Jiao Wang, University of Melbourne, “No more ‘straight Aas’ for China?”

31/052017

While any governments should take it as their own responsibility to prevent systematic or even fairly large-scale failures of banks, financial firms and other major firms (even with the so called potential too big to fail situations or scenarios), a blanket guarantee may create serious moral hazard problems. As a result, a good policy of government guarantee (explicit or implicit) should only be set to the degree that some failures of banks, financial or other types of big firms are allowed, or only guarantee those at the margin with significant financial and other forms of penalties.

Such a policy, in conjunction with other forms of prudential supervisions, will be able to prevent large scale or systematic failures that can jeopardize the whole system, while still provide sufficient incentives to those entities for them to avoid the moral hazard issue.

While it is understandable that structural and other deeper economic reforms may have some effects on the growth rate of the economy, it is often too easy to argue that the government should not pursue growth simply because reforms need to be undertaken. I think one has to balance reforms and growth, particularly one has to be careful not to create unnecessary excuses for not to work hard on the growth front.

China is still a developing economy and there is still a long way to go and a lot of potential for high growth to catch up with the industrialised world. Any waste in terms of growth, that is, not being able to achieve its full potential should not be accepted as good performance.