Amid Rapid Growth, Challenges for China's Economy The large-scale growth of China's economy has attracted notice from businesses and investors worldwide. But pressures -- from corruption to bureaucracy and the role of the state -- offer new complications. Nicholas Lardy examines future challenges to the country's economy.
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Amid Rapid Growth, Challenges for China's Economy

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Amid Rapid Growth, Challenges for China's Economy

Amid Rapid Growth, Challenges for China's Economy

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STEVE INSKEEP, host:

All week long, we've been reporting on the rapidly changing economic relationship between the United States and China, and we will finish with a look at some of the problems that remain for the future. We contacted Nicholas Lardy, the author of "Integrating China Into the Global Economy." He says one problem is corruption in China's government. Major Western corporations can often get around that, but smaller firms may not.

Mr. NICHOLAS LARDY (Author, "Integrating China Into the Global Economy"): Local officials have their hands out frequently. There's a licensing process for many kinds of businesses that local government officials control. Local government officials invest frequently in local businesses, so a foreign firm might be in competition with a firm that has at least a partial owner, a government official that would be in a position to influence or harm the foreign company's business prospects.

INSKEEP: In one of our reports this week, we met a Chinese woman who is basically an American middle-class worker making about $60,000 per year, but it was pointed out that the average person in China is making a tiny fraction of that, maybe a couple thousand dollars a year. What is income inequality going to do to China's future economic growth?

Mr. LARDY: Well, income inequality has increased dramatically, particularly over the last decade, and really, all dimensions of inequality have gone up. The gap between farmers and rural residents has gone up, between people that are fortunate enough to live on the coast and those that live in the deep interior, and particularly the gap between the skilled and the unskilled has gone up. Sometimes it feeds into corruption because sometimes peasants have their land taken away by corrupt local officials. They're promised a payment, then they don't get it. They see real estate developers coming in, putting in factories or high-end housing, and they haven't been paid what they were promised for giving up their land. They've lost their income, and so sometimes the inequality and the corruption interact in a way that poses major problems.

INSKEEP: That raises the question of whether the Chinese government really can attack income inequality at all.

Mr. LARDY: They certainly are not going to solve the problem overnight. They are changing the tax structure in certain respects; for example, they've eliminated the agricultural tax, which was a burden on China's low-income farmers. But the underlying problem is that in many economies--indeed, most economies, when you start growing fast and you have per capita incomes that are around a thousand dollars, plus or minus, which is where China is today, income inequality tends to go up as incomes rise, so they're working against very powerful economic forces, but there are some things they can do at the margin.

INSKEEP: Can China continue growing with the banking and financial system it has now?

Mr. LARDY: I think the answer to that is probably not. Their banking and financial system has been the Achilles' heel of this economy for a long time. On the other hand, the government is taking very aggressive steps to address the problems in the financial sector. They're allowing foreign investors in. They're changing the corporate governance of the biggest banks. I think the still big unanswered question is even though, for example, one of China's biggest banks went public last week and sold $8 billion of shares in Hong Kong, these still remain state-owned institutions. The state remains the dominant shareholder, and I think the record from other economies is that it's very difficult to have a highly-efficient banking system without going further than China has been willing to do to date towards private ownership.

INSKEEP: Can China's economy continue to grow if the government continues to stifle freedom of speech, freedom of religion and if the Communist Party remains in power?

Mr. LARDY: I think there's a reasonable prospect that they can continue to grow relatively rapidly without very substantial political reform. On the other hand, you cannot stand up and say, you know, `Let's overthrow the Communist Party.' But virtually all other speech is free. People can voice opinions on a wide range of issues. Citizens are suing the government in tens of thousands of court cases every year. The government is now holding hearings to solicit public opinion about how to deal with public policy issues, so it is a system that is evolving and, I think, will continue to evolve as incomes rise and the society becomes more urban and better educated.

INSKEEP: The last word on a series on business in China goes to Nicholas Lardy, senior fellow at The Institute for International Economics and author of "Integrating China Into the Global Economy." Thanks very much.

Mr. LARDY: Thank you.

INSKEEP: This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE (Host): And I'm Renee Montagne.

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