No pain, no gain for China's reformers

Squeezing those excesses out of the market is a necessary move to detoxify the rest of the economy. Most importantly, it will force the banks to reorganize their business.

This can't be called an austerity program, because we're talking about a long, slow process without a crash. Nor, certainly, is it quantitative easing. It is a deleveraging campaign.

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Actually, it's only recently that people can read news about funds in China collapsing, debtors defaulting and companies failing.

Getting those results has taken a GDP growth rate of less than 8 percent from the first quarter of 2012 to the fourth quarter of 2013.

If China can, in two more years of still lower growth (GDP expansion of 7.5 percent or less), it can reasonably hope to phase out a significant part of its old-economy industries.

And if, as some business commentators propose, the country is to eliminate up to half of its industrial base to make way for business based on the mobile Internet, it will have to keep the credit line really tight for local development projects.

The central government has declared that it will build a municipal bond market. But the period from passing laws and regulations to witnessing a functioning market could be at least two years.

It will take at least as much time to establish a credit rating system just at the city government level. To extend the system to all local governments, from the provincial level down to the township level, will require a much larger and longer effort.

So, with perhaps only a few exceptions, local governments will face a long period of tight credit. Many mayors and other officials will find it hard to achieve their development goals before their terms expire. Their most ambitious projects will be starved of funding.

People traveling to Haikou, Hainan province, and Beihai, in the Guangxi Zhuang autonomous region, can still see some "rotten-tail" (unfinished) buildings from property booms in the 1990s.

A boom cut short can leave nearly permanent scars on a city. There will probably be more cities in just that situation a few years from now.

Just as the central government has never helped Haikou and Beihai rebuild, it is all up to local governments to redirect their development path.

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