Many experts say the biggest economic problem China faces now is the
very nature of its state-driven economic system. That system worked well
when global demand for Chinese-manufactured products was high but it
now looks unbalanced when the global economy is weak.
Duncan Innes Ker, a China expert at the London-based Economics
Intelligence Unit, says the key to future growth will be to boost the
private sector. "At the moment the banking sector essentially serves to finance the
state-owned part of the economy and essentially starves the private
sector of capital in favor of the state sector, which is a big problem,
given that the state sector tends to be less productive, less
jobs-generative, and overall less efficient than the private
sector," Innes Ker says.
China's leaders have long said they want to foster economic growth in
the coming years by growing the private sector, boosting domestic
consumption, and diversifying exports. All are seen as keys to providing
future growth and jobs.
But change has proved hard to make due to the vested interests within China's one-party, state-enterprise-heavy system. Innes Ker says that China's new leadership has yet to reveal its
priorities publicly. But it appears to favor a conservative approach. "The balance does seem to be quite firmly in favor of conservatives so
it is possible that we may actually get a relatively timid approach to
reform of the state sector and continuing [state] dominance of the
commanding heights of the economy," Innes Ker says. "In that sort of
circumstance, it may be that China's growth rates in the medium term
might be even significantly lower than the 7 percent that we are
expecting at the moment."
The current reliance on state-enterprises -- which dominate their
sectors with little or no competition -- helps to create another drag on
China's economy: corruption.
Anger at Corruption
Outgoing Chinese President Hu Jintao, speaking at the Communist Party
Congress that ushered in a new leadership team, warned starkly that
failure to tame corruption could lead to the "collapse of the party and
the fall of the state."
Rod Wye, an expert on Chinese politics at Chatham House in London, says
China's leaders are well aware of the public anger that corruption
generates and that is why they have begun talking about it. But taking
effective action is another matter. "Corruption, as the Chinese leaders themselves say, is a life-and-death
matter for the Chinese Communist Party. But the fact is that it is
pretty endemic in China and it is not going to be easy to root it out in
any short period of time," Wye says.
One example is China's railway system. Beijing has invested hundreds of
billions of dollars in recent years to build a high-speed rail network
across the country. Yet an investigation into the crash of one of its
fast new trains in July last year, which killed 40 people, revealed
massive amounts wasted due to corruption. In just one small case, a big
state-owned company paid a $16 million commission to an intermediary to
secure contracts to work on the rail projects.
China faces a host of other challenges that could slow its economic growth in the future. One is the dramatic aging of the Chinese population, accompanied by the
shrinking of the country's workforce beginning in 2015. That is partly a
consequence of the one-child policy adopted by the Communist Party in
1979 to stem population growth.
Kenneth Pomeranz, a professor of history at the University of Chicago,
says changing demographics will soon present the Chinese leadership with
some stark choices. "Everybody can see that the very, very rapid graying of China's
population -- already under way in part because they have had 40 years
now of a very low birthrate -- is going to cause big problems," Pomeranz
says. "They are going to make a pretty sudden transition from a society
with a very high percentage of its population in the labor force to a
society with a much lower percentage of the population in the labor
force and more people who need to be supported." That means China increasingly will have to find ways to work more
efficiently with less people as the days of cheap mass labor end.
And then there is the problem of pollution. China has achieved its industrial growth so far largely at the expense
of its environment, to the point that today it is the world's biggest
emitter of greenhouse gases. But as public protests over the environmental and health effects begin
to be seen, the country may have to invest more in cleaner technologies
at the expense of simple investments in raw materials and
industrialization. All of which could mean that China in the future will face many of the
difficult challenges developed countries already face. How well it
overcomes them will determine what kind of growth rate its next decades
This post appears courtesy of Radio Free Europe/Radio Liberty.