China: Time to Change – Andy Xie

From The MorganStanley.com (link):

Rising internal tension over inequality and external friction over China’s trade success suggest that China’s government-led and export/investment-driven development model may be reaching its limits. It is in China’s interest to change the model before the tension reaches the point of triggering an economic crisis.

China’s development model has concentrated financial power in the government and related enterprises. It has led to insufficient consumption, concentration of wealth and income, a rising trade surplus, and frequent asset bubbles, which damage the nation’s financial health.

The model is causing considerable inequality in income and wealth by international standards. The perception that privileges rather than fair competition is the cause of inequality is leading to an increase in social incidents, which may affect economic growth in coming years.

China’s excessive dependence on trade for employment growth is increasing friction with its major trading partners. China’s trade surplus may surge in 2006 and 2007 because of an investment slowdown triggered by overcapacity. The tension with China’s trading partners may spin out of control.

February 28, 2006 9:30 AM
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Categories: Economy