China Leadership Monitor

Loans, Firms, and Steel: Is the State Advancing at the Expense of the Private Sector?

Thursday, November 19, 2009

China pulled its economy through the financial crisis by recourse to a massive fiscal and monetary stimulus.  While successful, the stimulus has significant hidden costs that will burden the economy in the future.  Because it was channeled through state banks to state firms, the stimulus strengthened the relative position of state firms and extended the state's reach into the economy.  Events in the banking and steel industry exemplify the process.  Rapidly changing economic conditions open the possibility that the damage may be reversed by good policy-making going forward.