Is China's growth sustainable without reforms?

Bullet train at Beijing South Station China has invested heavily in infrastructure over the past decade - but at what cost?

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Beijing's modern southern railway station, where high-speed trains whisk well-heeled passengers to their destination, is a proud symbol of China's desire to leapfrog a whole stage of development.

In the past decade China's economy has more than tripled in size, becoming a global force, and with the eurozone in crisis and the US hobbled by political paralysis, some analysts believe China can become the driver of global growth.

But China's vast population means that in per capita terms, its citizens are now about as wealthy as those in Jamaica or Albania and it has pressing economic problems.

Vested interests

Just a couple of hours from the gleaming Beijing rail station, there are villages which do not even have paved roads.

Professor Li Daokui, an economist and adviser to the monetary policy committee of the People's Bank of China, says that despite China's success, it now urgently needs to focus on reform.

"The government has been extremely proactive in promoting economic growth, especially local governments," he says.

In China, local governments compete with each other in coming up with pro-growth measures to attract investment.

Start Quote

Most people in China, from those active on the internet to academics and policymakers, share the consensus that change must be implemented”

End Quote Professor Li Daokui Economist

There is the belief, however, that many of those governments are not functioning properly.

There are also interest groups lobbying for certain policies and subsidies for specific industries. This worries some economists.

"China is at a critical moment for a new round of reforms," says Dr Li.

He quotes a Chinese proverb: "Only a person who is wearing a pair of shoes knows how comfortable he or she is."

He says that many people inside China are aware that they are wearing an uncomfortable pair of shoes - namely, that the government needs to enact reforms.

'Non-useful'

"In the last few years, many reforms have been delayed," he says.

He maintains that two kinds of reforms are needed: "First is reform of the standard economic institutions, including our taxation system and the way our government is earning money."

Farmers in Wanghu village, Hubei province Urban areas have witnessed growth while many rural people still live in relative poverty

Beyond that, there are other important institutions which need to be reformed, specifically the public health system, which is extremely unsatisfactory from the population's perspective.

He also says the education system needs reforms.

"Our kids are working too hard on non-useful things," he says.

He says his own son is having to learn things which will not benefit him later, but if he does not learn them he will fall behind at school.

Other things he believes needs to be changed are the county's basic social welfare system and housing.

Growing concern

Despite the enormous economic success, there are still hundreds of millions of people who have not benefited.

Start Quote

Consumption is repressed to generate the high gross domestic product (GDP) growth”

End Quote Professor Michael Pettis Peking University

Even people who are benefiting are worried that they are not doing as well as some other segments of the population, according to Dr Li.

"The degree of inequality is dangerously high," he says.

This inequality has led to an increase in complaints about the housing market, whereby the price of property is too high for low- and middle-income families.

"Most people in China, from those active on the internet to academics and policymakers, share the consensus that change must be implemented, and only after that can the country have continued and sustainable success for the economy," he says.

Economic bubble

Not everybody believes that China is on an inevitable path to world economic domination.

Some people question whether the growth is really sustainable.

There are concerns about the huge investments in infrastructure and the debt that incurs, the reliance on exports to foreign consumers, the dominance of state-owned enterprises, and the government's continued controls on banks, interest rates and capital flows - all of which distort the economy.

Professor Michael Pettis at Peking University's Guanghua School of Management, says there will not be any change until there is a significant restructuring of the economy.

He believes that China's growth will slow very sharply without that restructuring.

"The problem in China is that is has been growing very quickly, but the way the growth model works, consumption is repressed to generate the high gross domestic product (GDP) growth," he says.

China subsequently produces more and more which the rest of the world has to absorb, but the big problem in the world is lack of demand.

Commenting on the number of BMWs and Land Rovers on the streets and the modern buildings, he says: "It is a sign of a bubble, not a sign of healthy growth."

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