World Bank Highlights China Risks

By John Richardson

A NEW report by the World Bank on China, summarised on the slide below, supports what we argued in chapter 6 our e-book, Boom, Gloom & The New Normal: That without the success of efforts to reform the economy, the country risks a significant slowdown.


WorldBankChinaFeb2012.jpgThose reform efforts, detailed in the 12th Five-Year-Plan (2011-2015), involve tackling vested interests, such as local government officials and executives of the state-owned enterprises (SOEs), who could fight tooth and nail to keep the current system in place.

A further problem is that as global economic problems jolt China, the temptation is to revert to the tried-and-tested method of guaranteeing social stability in the short term, which is state-funded investment in infrastructure and in new industrial investment, which we saw on an enormous scale in 2009-2010. The problem is that this worsens China’s imbalances by widening the gap between those with access to capital during these stimulus packages – the SOEs and the speculators who drive-up assets prices – and those without access: The 96 percent of Chinese who are forced to live on 20 dollars a day.

Pouring money at the problem also places more strain on the banking system, due to misallocation of capital as political connections can be more important in lending decisions than proper due diligence.

The World Bank also cites the need to foster greater commercialism and entrepreneurship in China, which would involve reducing the influence of the SOEs.

These are some of the themes chapter 10 of our e-book, published in March. The chapter also looks at government policy challenges in the West, as well as China.

Part of the 12th Five-Year-Plan is raising minimum wages while making huge investments in “higher-value” industries, such as electric battery-driven cars.

The aim is to justify these higher wages, and thus avoid the “middle-income track” mentioned by the World Bank, in the way that South Korea has managed.

But can this be achieved through central-planning alone in the case of China? Or is more openness required? Is a bigger role for private industry needed at the expense of the SOEs?

South Korea’s history suggests that the answer to all of these questions is “yes”.

China, however, has to date been hugely successful thanks to an economic model that is often compared favourably with that of the US. In the US, lack of government involvement in developing new industries is part of the problem.

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