Experts: China must slow growth, avoid trap

11/09/2012 6:30 AM

11/09/2012 6:39 AM

China’s new leaders, set to be unveiled next week at a once-a-decade transition, will soon be handed the keys to the world’s second-largest economy.

But unlike their predecessors, who embraced growth at all costs to spur the country forward, China’s incoming rulers will be tasked with steering the economy toward a more sustainable path.

China must boost its private sector, reduce its reliance on low-cost exports and big-ticket public projects, and put more money into the hands of ordinary Chinese, experts said. Failure to do so could stall China in the so-called “middle-income trap” – unable to innovate like advanced economies but too prosperous to compete with low-wage manufacturing nations. Adding to the crunch is China’s rapidly aging society, which is shrinking the country’s workforce.

“After 30 years of fast growth, the economy has reached a point where it is no longer sustainable,” said Wang Jun, an economist at the China Center for International Economic Exchanges, a government think tank in Beijing. “Unless we adjust the structure of the economy, it will be hard to find new ways to grow. That’s the difficulty we’re facing today.”

Among the challenges are opening up industries dominated by heavily subsidized state-owned enterprises, which a recent World Bank report said are stifling innovation and creativity. China’s massive trade surplus is a source of friction with the U.S. and other trading partners. Meanwhile, growing income inequality between China’s rich and poor is straining the nation’s social fabric.

China’s economy grew 7.4 percent in the third quarter, the weakest pace of growth since the aftermath of the 2008-09 financial crisis. The slowdown highlights China’s vulnerability to economic weakness in Europe and the U.S., its biggest export customers.

The Communist Party’s legitimacy depends on its ability to deliver robust growth in gross domestic product. China’s next president, Xi Jinping, and next premier, Li Keqiang, will have to lead a government that can manage expectations at a time when most Chinese are clamoring for ever higher standards of living.

“Basically, for the last 30 years it’s been boom, boom and boom,” said Kerry Brown, executive director of Sydney University’s China Studies Center. “You have more than a generation that know nothing but boom. It’s an extraordinary mindset for people to be in. I don’t know what the appetite is for being told to tighten your belts and accept more balanced growth.”

Although growth has lifted tens of millions of Chinese from poverty, it has created a huge divide between rich and poor. Income inequality is the chief challenge confronting the nation’s development, according to participants in a recent online poll by the government-run China Youth Daily.

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