Toward reforms

Last January, the newly-elected mayor of Shanghai Yang Xiong unveiled Shanghai's plan to develop the mainland's first free-trade zone, which in time could overtake Hong Kong.

The Shanghai free trade zone plan has developed parallel with financial reforms. In 2012, China tightened rules on delisting companies, cut trading costs, increased quotas for foreign institutions and encouraged dividend payments. Last March, the securities regulator announced that China will allow the residents of Hong Kong, Taiwan and Macao to open domestic accounts on the mainland.

China's equity, bond, and currency markets have expanded significantly for more than half a decade. We are about to see the dawning of a new era of financial deregulation which could climax with the convertibility of the renminbi after the mid-decade.

Consumption-led growth requires more sophisticated financial services, which can support economic growth, strengthen small and medium-sized enterprises (SMEs) and thus foster employment, while ensuring social support for Chinese people.

In early May, the State Council unveiled an extensive plan for economic reforms in 2013, which have the potential to make China's economic growth more balanced and sustainable in the years ahead. In addition to the impending financial reforms, these trends will be supported by the proposed Shanghai free-trade zone, and, perhaps most importantly, the plans for a new type of urbanization. It is expected that the plans will be implemented in the fall.

If everything goes according to plan, mid-summer 2013 will prove the strategic turning point.

Managing the debt burden

In the short-term, China will continue to rebound. In the medium-term, China is likely to witness several structural reforms. These, in turn, are predicated on the reduction of the current debt burden.

Amid the global crisis, the Chinese stimulus package of US$630 billion restored confidence in the economy and boosted infrastructure development. But, just as in the U.S. and Western Europe, the stimulus also steered massive liquidity to the markets, which contributed to volatility and debt accumulation, rather than to SMEs, which would have fueled stability and prosperity.

As I have argued in the past two years, if the definition of debt would be expanded (via the inclusion of local government finance vehicles and off-budget funds), China's debt would prove to be more than 40-45 percent rather than 20 percent. Even then, it is still manageable, as long as local governments move toward new growth models. That's the precondition, because further rapid debt growth would raise the risk of a disorderly adjustment in local government spending, which, in turn, would slow down growth.

Debt reduction is also vital to avoid disruptions in the provision of social spending, since the majority of education, health, and welfare spending is implemented by local governments.

Unlike advanced economies in which growth is lingering amid excessive austerity or inadequate growth, China continues to have huge growth potential for years ahead. But it is the reforms that can realize this potential.

Dr Dan Steinbock is research director of international business at India, China and America Institute, an independent think tank (USA), and visiting fellow at Shanghai Institutes for International Studies (China) and EU Center (Singapore)

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.