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Beyond Structural Reform in China

There is reason to believe that China’s supply-side rebalancing is moving in the right direction. But unless China’s leaders also tackle the challenges posed by market and bureaucratic inefficiencies, the objective of strong and sustainable growth will remain out of reach.

HONG KONG – Global markets have breathed a sigh of relief. Following the shock of the United Kingdom’s vote to exit the European Union, GDP data indicate that China’s economy seems to have escaped a slump, with annual growth averaging 6.7% in the first half of 2016. But that does not mean that China is in the clear. On the contrary, the success of the structural rebalancing that China needs to ensure sustainable long-term growth is far from certain.

To be sure, President Xi Jinping’s government is committed to structural reform. China’s leaders know that they can no longer rely on stimulating short-term demand. Already this year, annual growth in fixed-capital investment has fallen by 2.4 percentage points, to 9%, with the private-sector investment up by just 2.8%.

The plan now is to implement supply-side structural reforms aimed at boosting productivity and improving the functioning of both the market and the state. But, given China’s size and diversity, not to mention its deep integration into the global economy, communicating and implementing new policies across regions, sectors, and social groups will be very difficult. If China is to succeed, its leaders will need to think beyond their traditional top-down approach.

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