Stuctural reform not stimulus

Debates about the slowdown in China's economic growth, the subdued global outlook, and how the government should respond have heated up again. As in late 2008, China's economy is slowing while the global economy is suffering from turmoil in the developed world. Then the center was the US subprime market and the collapse of Lehman brothers. Now it is the eurozone and its fiscal and banking sector problems.

Harking back to the deep recession three and a half years ago and the collapse of global trade that followed, some people are urging the government to take action, possibly along the lines of the bank credit-financed stimulus package that China implemented in 2008-10. This stimulus package is rightly credited with keeping China's economy growing at a critical time, thus supporting the global economy.

However, the stimulus package also saddled China's economy with some problems that are still being processed. A bout of new bank lending in 2008-10, equivalent to 60 percent of GDP, has led to concerns about non-performing loans and unsustainable local government debt. It also raised inflation expectations and, with a lot of liquidity flowing into the housing market, fueled a housing price boom that the government is still attempting to rein in.