Will China Hit a Speed Bump?

We’ve gotten used to the rise and rise of China. Every year for the last three decades, it has had growth at a staggering rates, almost ten percent per year. We’ve almost become used to the idea of a permanent China boom. Now, what if that were to change? What if China were to hit a big speed bump?

That’s what a new World Bank report worries about this week. It’s called “China 2030” and it warns that unless Beijing puts in place a number of structural reforms it will be doomed to what’s called a “middle-income trap” of slow growth. That’s what happens when the factors that lead a poor country to high growth - cheap labor, for example - disappear once it becomes a mid-tier economy. Then its growth rate slumps. To avoid that fate, the World Bank makes a series of recommendations - from letting the market play a role in setting interest rates to decreasing the role of the state in business.

Now, these are smart ideas. But they’re not new; economists have been saying this for years. So what’s the fuss?

It turns out the report was co-authored by a top Chinese think-tank which often advises the government. This is important because for the first time it gives a World Bank study a semi-official stamp of approval.

There is a debate going on in Beijing at the highest levels. On the one hand, you have some pragmatic economic minds who acknowledge that for China to become the world power it aspires to be, it must allow the world in. Foreign banks, for example, manage less than 2% of the Chinese financial system. On the other hand, China’s state-driven economy has served it very well. It’s been barely affected by the recent financial crisis. It was also insulated from the Asian financial crisis 15 years ago. That kind of resilience allows conservatives within Beijing’s top echelons to oppose any major changes or reforms.

What’s clear to me is that this is a year of waiting and watching in China. In a year when 70% of the country’s leaders will change over, no senior official will take the kind of risk that would jeopardize his or her career. But that only increases the risk of a slump in a few years if nothing is done now.

The Financial Times columnist Martin Wolf points out that the next global financial crisis will likely come from China. Simply because of its scope and size, that’s not a far-fetched assumption. Remember also that very few countries have avoided financial crises after reforms and global integration. Wolf points out as examples the U.S. in the 1930s, Japan and Sweden in the 1990s, or the Euro Zone right now.

China is on course to become the world’s biggest economy, even if and when it slows down as per the World Bank’s projections. But it will need to make major structural reforms to have its growth be sustainable and to make it harmonious with the global economy. There is a danger to rushing into reform; that’s what’s keeping China cautious right now. They’ve handled things well so far. But one of the lessons of the financial crisis surely is that nothing goes up in a straight line forever.

By Fareed Zakaria, from: http://globalpublicsquare.blogs.cnn.com/2012/03/05/zakaria-will-china-hit-a-speed-bump/