Faced with a decline in export demand for the foreseeable future, China must take difficult steps to create a new, private-sector dynamism in its still heavily state-controlled economy, concluded Arthur Kroeber of the Beijing-based Dragonomics consultancy.
“If China wants to maintain its 8pc GDP growth there needs to be a replacement found for the productivity growth that has been lost in the export sector.
“Ultimately what this will require is a deregulation of the service sector and significant reform in a financial sector that is set up to reward capital expenditure and heavy industry but does not serve the private sector or private enterprise at all well.
But China’s state powers might be unwilling to do just that, Kroeber goes on to explain, although he remains optimistic in the long run.
“The problem is that control of the financial sector is central to maintaining the current political order in China. Reform will take power away from the state and put it in the hands of the private sector actors and that leaves the state with less and less control,” he said.
On a pessimistic view the Chinese state would be unwilling to sacrifice political power for economic efficiency gains, Mr Kroeber added, with long-term negative consequences for China’s emergence as a world economic power.
However optimists – a camp in which Mr Kroeber included himself – would point to the story of the last 30 years of economic reform in China and say it showed China’s communist leaders had, time again, showed they were willing to cede direct control over more and more parts of the Chinese economy.