Nature's power: A vegetable greenhouse in central China's Henan Province uses wind power for lighting and major power supply. Clean energy and new technologies are being introduced to propel local economic development  [By Wang Song/Beijing Review]

Risks and challenges

Although the Chinese economy's growth prospect is optimistic, it still faces multiple challenges, some of which are severe, such as the uncertainty of the U.S. and European economic recoveries, rising inflation pressures, emerging financial risks of local governments and tightening monetary policies for small and micro enterprises.

The biggest challenge comes from uncertainties and instabilities from the external economic environment. Europe's sovereign debt woes and tepid global economic growth will add uncertainty to domestic policymaking. If the United States launches another round of quantitative easing this year, it will strongly affect the global economy.

Inflation pressure remains big due to loose liquidity conditions at home and abroad, and imported inflation and rising costs at home.

Even if we tighten our monetary policy and freeze extra domestic liquidity, rising labor costs and imported inflation will still be a long-term problem we have to tackle.

A close eye still needs to be kept on food price hikes. We identify three categories that are more vulnerable to price fluctuations: agricultural products with slower labor productivity growth, for example, pork and vegetables; non-tradable products such as real estate, which can't be adjusted through international trade; and resources products. Prices of all three categories are facing rising pressures.

Monetary tightening is necessary but not enough for us to combat cost increases and imported inflation simultaneously. This calls for the fiscal policy and structural reform to play a more important role. In addition, we need to encourage market competition in specific sectors to ensure price stability.

Oil and power shortages also persist. It shows that the energy supply system and resource price reforms need to be pushed forward more forcefully.

The business environment for small and micro firms is getting harsher. The biggest challenges for them are rising costs and scarce financing. They are facing intense pressure to survive and grow.

Pressure from economic restructuring is intensifying. Slowing economic growth provides a good opportunity to change the economic structure, but it gives challenges from a renewed international technological and industrial revolution China is likely to fall behind if it does not take the opportunity to adjust its economic structure soon.

Local fiscal and financial risks—risks from local government debt and financing vehicles—are emerging. The Central Government is taking measures to clean and normalize local government financing so as to curb debt issuance and establish an effective mechanism.

Macro-control policies should continue and remain stable but they need to be improved. Focus should be put on long-term reforms and transformations.

If the restructuring progress goes well, we expect to see declining energy consumption and carbon emissions by 2015. The economy will grow at a relatively fast pace, while the Chinese people can benefit more from the growth.