China’s Impossible Trinity: The Structural Challenges to the by Chi Lo

By Chi Lo

This booklet highlights the tough coverage selection that needs to finally be made in the course of China's structural reform in line with the speculation of the very unlikely Trinity, among alternate price and fiscal coverage autonomy.

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Additional resources for China’s Impossible Trinity: The Structural Challenges to the “Chinese Dream”

Example text

However, one should be realistic about what the new leaders can deliver because there are severe constraints limiting the pace and scope of reforms. It is true that the reform process has come to a crossroads, where decisive actions are imperative and muddling-through is not viable. But entrenched vested interests will constrain the pace of new structural reforms so that implementation may miss market expectations in some areas. Judging from the reform momentum pushed by the Xi government so far, the glass remains half-full for future reforms.

The role of the state in the economic transition process is to manage these conflicting effects from reform and growth to minimise volatility. But market opinions on how to strike a balance diverge sharply. Neoclassical-minded analysts argue that China’s economy would self-adjust, so the government should actively push reforms and leave the economy to go through the process of “survival of the fittest”. Moderate reformists argue that this kind of “shock therapy” would inflict serious instability and social cost on the economy.

It also means that Beijing would have to conduct economic management under free capital flows, a task that it has not been exposed to before. Perhaps worst of all, these changes would have to come more or less at the same time, raising the risk of policy mis-step and systemic chaos. Not only that. Changes without sufficient preparation will disrupt the real economy, risking derailing the reform plan. Consider this. Cheap labour, low-cost bank funding for infrastructure construction and large-scale fiscal spending funded by land sales have all contributed to China’s economic success.

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