China Needs a New Model: Unlikely to Find One

China's growth model is badly in need of revision. But the sort of reforms which China desperately needs to make, are unlikely to prove attractive to China's leadership -- neither the outgoing bunch or the incoming one.

China needs to find a new economic model. Relying on abundant cheap labour, cheap capital and welcoming export markets is no longer a viable road map to the future in a nation where the leadership from Deng's days on has embraced growth as a political weapon to buttress the party's claim to power; and where, as a result, materialism rules rather than communism or Confucianism.

Wages are rising by more than 10% a year as blue-collar workers' pay is used to drive up consumption, which plays much too small a role in driving the economy. Cheap credit produces dangerous liquidity bubbles. Foreign demand has fallen sharply as rich countries run into problems of their own.

Above all, Chinese leaders know that they need to steer the country away from the volatility of the past five years – big boom in 2007, slump in late 2008, revival in 2010-11, and now a slowing down again. What they need is a more stable medium-term outlook to coincide with the assumption of power by a new generation of Communist party leaders at the end of this year and the appointment of a new government next March.

...This requires undertaking the structural reforms – for example in land ownership, labour mobility, capital market and pricing of energy and water – that Hu Jintao, the party secretary, and Wen Jiabao, the premier, have fought shy of. Xi Jinping, the politburo member who will replace Hu when the party holds its five-yearly congress late this year, is not known as a risk-taker – he got to the top as a consensus figure who keeps his mah-jong tiles close to his chest. But a real debate about the need for economic – not political – reform is going on. _Guardian

Brian Wang is positive about China's economic growth

The problem with the generally positive viewpoint of the Guardian article above, and Brian Wang's rosy viewpoint, is that few people are acknowledging the avalanche of bad loans passing through China's banking system, pushing cash into corrupt state owned enterprises, and politically connected persons with close ties to central and regional governments.

No one is detailing how all of this bad debt and misallocation of resources is going to be processed through the system, while keeping growth and GDP numbers high.

The current Chinese economic model allows wealth and power to rest firmly in the hands of governmental leaders, their families, and those closely connected to them. But it does not allow for crucial market signals to be passed down the line and acted upon at the necessary levels, in sufficiently prompt time for long term market vitality.

Artificial stimulus and momentum can prop up a putrifying system for quite a long time, if the stimulus is large enough.

China has already been forced to adapt to shrinking export markets by creating an artificial infrastructure boom-bubble. The expiration date -- the burst date -- on that bubble is ticking closer.