China’s Reform Anxiety

BEIJING – Since 2010, global financial circles have been obsessing about China’s slowing economy. But, while the country barely met the official target of 7.5% annual GDP growth in the second quarter of this year – generating significant anxiety worldwide – China’s government seemingly remains calm, showing no indication that it plans to launch yet another stimulus package. Do China’s leaders really have the situation under control?

In fact, the Chinese government’s stance – based on Premier Li Keqiang’s “Likonomics,” which prioritizes structural reform over rapid GDP growth – will prove to be in the best interests of China and the rest of the world. China’s structural problems – including restrictions on labor mobility, a rigid and risk-laden financial system, and excessive reliance on government investment – are threatening its stability and economic development. Given that China’s GDP growth rate remains respectable relative to the rest of the world, the need to emphasize structural reform is clear.

But, despite well-intentioned statements and narrow gestures, China’s new leadership has yet to establish a concrete, bold reform plan capable of resolving the economy’s deep-rooted problems.

For example, last February, the State Council announced plans to reform the hukou (household registration) system, which assigns legal residency according to a person’s place of birth. The system makes relocating very difficult, as those who do not manage to acquire local residency permits face major hurdles in gaining access to public services when they migrate to other provinces. Indeed, their children are even prohibited from taking college entrance exams.