As Growth Slows, China's Era of Easy Choices Is Over

More likely is that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.

...

"They don't want to take the pain," said Alicia Garcia Herrero, economist with investment bank Natixis SA. "But the longer they wait, the more difficult it becomes."

...

Some state firms remain in business despite massive debt, several years of loss-making operations and a weak business model--Chinese officials have dubbed them "zombie" companies. Earlier this month, during a visit to the northern industrial city of Taiyuan, Mr. Li railed at the drag of "zombie" companies, according to a government account. He said they should be denied loans to reduce excess supply in the steel and coal industries.

...

Reducing the footprint of these state behemoths, let alone getting rid of them, poses a huge challenge. Société Générale CIB calculates that a 20% reduction in excess capacity among state companies in the most distressed sectors of iron and coal could lead to 1 trillion yuan ($151.7 billion) in bad loans--equivalent to 2% of the nation's bank loans--and 1.7 million laid-off workers, or 0.3% of the urban workforce.

...

Chinese leaders are aware of the risks. On Tuesday, Premier Li Keqiang called for a greater focus on innovation to spur new sources of economic growth and to revitalize traditional sectors, according to the Xinhua News Agency...

Progress to date, economists said, has been disappointing. Political objectives stand in the way. Mr. Xi has committed the government to meeting a goal of doubling income per person between 2010 and 2020, the eve of the 100th anniversary of the ruling Communist Party. That means, in Mr. Xi's eyes, that growth must reach 6.5% annually.