Econs

The article discusses China's growth in these recent years. It forecasts that China's growth is not sustainable; thus growth rate will cease next year because the country is operating at full potential, facing the risk of overcapacity. In addition, China now has to face the severest national debt in its history, which puts its economy in extremely vulnerable state. The author also argues that China should stop relying on strong fiscal policy, but to initiate an economic reform if it wants to keep its dazzling growth record. Let us analyze whether China's situation is as problematic as the author perceives.
Economic growth indicates an increase in national output as well as national income. There are two types of economic growth, long-run and short-run. In the short term, economic growth is influenced by aggregate demand (AD). If there is spare capacity in the economy, an increase in any components of AD - includes consumption (C), investment (I), government expenditure (G) and net export (X-M) - will give rise to a higher level of real GDP. Long-run growth, on the other hand, depends on the economy's aggregate supply, which is also known as productive capacity.
The article predicts China's growth is a short-run growth because the main drive for it is the pro-active expansionary fiscal policy that China has been adopted since 2008, the year of global financial crisis. Two main tools that the Chinese government put in place to combat this great recession are a stimulus package and comprehensive tax reform. As mentioned above, government expenditure is a component of AD, so when the government expenditure changes, AD changes and thus real GDP changes subsequently. This induces a change in consumption expenditure, which bring in the process of government expenditure multiplier.
In the case of China, the stimulus package includes 4 trillion yuan to spend on boosting China's domestic demand1. AD changes from AD0 to AD1 (Figure 1), causes real GDP to rise from Y0 to