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A More Free China?

A month ago the World Bank and the Development and Research Center of the State Council of China (DRC) along with the Ministry of Finance (MOF), released a joint report projecting a decline in Chinese economic growth over the next 20 years if the government does not implement serious reforms. This report came as a surprise to many since China has enjoyed unprecedented 10% economic growth for the last 30 years. An even greater surprise was the support and cooperation that the MOF and Chinese government have shown not only in the creation of the report, but also in its findings.The report shows China’s economic growth dropping to 5% by 2030. 5% is still a strong growth number, and one the US should be jealous of, however, it brings into question when China will be able to lift itself from a middle-income economy to a high-income economy.

 

Economic growth in China over the last thirty years harkens back to the Trente Glorieuses in France from 1945-1975, a time in which France enjoyed 5% annual economic growth. France’s growth, just like China’s, was fueled by gains from productivity and industrialization. The last thirty years for China have yielded the benefits of government sponsored enterprises that have moved millions of peasants into the productive manufacturing sector. China now leads the world in manufacturing and like France did, has now started to reach the limits of growth through higher worker productivity (moving workers from small farms to sophisticated manufacturing plants).

 

This is the problem that the World Bank report seeks to address. With the help of some of the top Chinese economists, they have devised six areas in which the government can improve and foster continued growth.

 

  1. Move towards a more free market with much less direct government control. This means rethinking the government’s role in the market and the financial sector.
  2. Foster open innovation by investing in R&D and world-class research universities.
  3. “Go green” by increasing efficient resource allocation and investing in greener development.
  4. Combat inequality and expand opportunity through delivering more and better social services.
  5. Ensure greater fiscal stability by supplying adequate funds to local governments for social and environmental spending as well as budget concerns.
  6. Become a greater player in the global trade and finance economy by increasing the trade of goods and knowledge.

 

The 468 page report outlines in detail how all the reforms and goals can be accomplished to create a more pro-growth and economically prosperous China. It will be interesting to see whether this report will play a significant roll in the future regulatory plans of a Chinese government that could be rocked to its core by a slow down in economic growth or a recession.

 

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