Somewhat overlooked last week was an interesting piece by Eswar S. Prasad, Next Steps for China, in the latest issue of IMF magazine Finance & Development. He argues that financial sector reform is a crucial element of a long-term growth strategy for China.
The exchange rate regime is just one piece of the broader reform agenda in China. The [paper] ..assesses what China needs to do to ensure the durability of its economic expansion by addressing the looming issues of financial sector reform and the need to bolster balanced domestic-led growth.
On investment, Prasad comments:
Growth is undoubtedly a wonderful tonic. But there is a potential dark side associated with the fact that a significant portion of this growth in recent years has come from investment, with rising fixed investment becoming the main driver of output growth since 2001 (see Chart 3). A good chunk of this investment is likely to prove unproductive from a long-term perspective. Even building bridges to nowhere can raise output in the short term but is hardly a good use of resources. For it is ultimately consumption rather than investment or even output that is a true measure of economic welfare.
The piece is quite short, but includes some impressive charts - such as the one shown. See also the China country focus chartset in the same issue.
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