“However, reform of the state-owned enterprise sector and encouraging the private sector will help boost productivity.”
The problem is that this could cause further problems, mainly because the Chinese economy does not operate under the same rules as those in Europe. In fact, the wider Chinese economy is still largely closed – Beijing retains capital controls, which limits the amount of money that can flow in and out of the country. It also decides whether interest rates go up or down and controls liquidity.
All this power has allowed the government to people’s savings to provide cheap loans to industry – one reason the economy has been able to keep growing since the global financial crisis in 2008.
Any attempts to move away from this unsustainable model by the new government are likely to result in further pain for the Chinese economy.
“China faces significant challenges as part of its transition to an economy with a moderately slower growth rate,” Mr Coulton explains.
Mr Ehrmann argues, however, that this should not scare off emerging market investors. “In this new China, the catchphrase for investors has to be quality not quantity,” he adds.
Jessica Bown is a freelance journalist
