Photo: STATIC6 on flickr
Economic rebalancing was a crucial part of China’s Twelfth Five Year Plan, approved in 2011.But the world and China itself have known for a while that China’s investment-centric economy was unsustainable and it needed a dramatic shift towards consumption driven growth.
George Magnus, senior economic advisor for UBS sees a catch-22 for China. He thinks the radical reforms that they need could in fact bring about the very slowdown they’re trying to avoid:
“The economic problem for China’s new leaders is that radical reforms, which would divert the flow of financing, tax, subsidy and other benefits from state-owned enterprises and state-owned banks to private sector SMEs and households, could exacerbate the weakening investment trend and induce the very economic slowdown which they want to avoid.
And the downswing in investment, with its attendant adverse consequences for employment and financial stability, is always more likely to precede the benefits that come from a structural strengthening of the household sector and businesses catering to it.”
But Magnus thinks the biggest hurdle to China’s reforms are its politics. He says these reforms are likely to divert power away from local governments including military authorities with commercial ties, and they are likely to resist such change. Those in power are going to want to cling to state capitalism, while those one the other end of the economic spectrum that see wealth inequality, will want to democratize the market.
Magnus doesn’t expect a hard landing in 2012, and says in the medium term, more important than the hard/soft landing debate, are China’s choices between state capitalism and market-oriented capitalism.
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