China at the crossroads – the low hanging fruit has been picked.

Tomorrow sees the hand over of power within the Chinese political system and corporate strategists at multinationals are anxious to know China’s new leaders agenda. It seems that Jiang Zemin – China’s ex-leader – has stopped reforms which have implications for Asia and the rest of the world. Some of outgoing President Hu Jinto’s young leaders have been dumped from the seven-man Standing Committee which drives Chinese economic policy – they were to continue the economic reform of China. Their ousting looks like a victory for the Chinese traditionalists who claim that strict control of banks and key industries protected China from the GFC in 2008. However one has to debate this argument when you consider that China bounced back from the GFC by implementing the following policies that created growth:

* Fiscal stimulus to the value of 16% of GDP
* Credit growth at 30% each year
* Investment 49% of GDP in 2011

The World Bank has warned that China’s export-led growth implemented 30 years ago is now outdated. As Andrew Evans-Pritchard stated in the Daily Telegraph (UK) China has already picked its low hanging fruit of state-driven industrialisation.

Stagnation lies in wait if the country clings to the dirigiste (central planning) model.

China and the Lewis Point
Arthur Lewis pointed out that with the expansion of the modern sector of a low-income country, the “unlimited labour supply” (from the rural sector’s labour surplus) would disappear and as a result the country will enter into a phase of faster real wage increase. China has reached this point as the surplus of cheap labour form rural areas has started to subside. Manufacturing wages have been rising by 16% a year for the last decade but more worrying is that it has been outstripping productivity. The competitiveness of the Chinese economy must now come from innovative enterprise and free thinking, something that has been difficult to encourage within the political system.

There is nothing envitable about China’s economic fate. Whether it succeeds or fails is entirely a political choice , and one that is being made before our eyes. Daily Telegraph

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