Short-term pain ahead as China pushes on with economic reforms
David Liao says market must play bigger role as maintaining status quo would threaten prosperity
Despite the challenges, China's leaders are pushing into the most critical phase of their ambitious reform programme, cautiously unleashing the power of private investment and consumption to breathe new life into the slowing economy. But it will be a tough road.
The systems that successfully marshalled the capital to drive China's first phase of growth are being swamped by the more complex economy they helped create. The result has been increasing misallocation of resources and growing imbalances within the financial sector. The solution is to allow market forces to play a greater role in the economy; although simple in conception, in execution it is akin to playing three-dimensional chess against the clock.
Shifting China's enormous economy from a state-controlled, investment-led growth model to a market-led, consumption-heavy model will not happen overnight. But, this is not the first time that China has faced both cyclical and structural challenges. The government has the resources to avoid a hard landing, but delaying reforms would in itself pose a risk to the long-term health of the economy.
The time frame for significant reforms should be within one to three years, but this year and the next will be vital in pushing forward. The leadership is committed to reforms and has recognised that the price of inactivity is likely to be much higher than the costs of reform.