Financial Reform in China

New Economist finds an interesting piece on the need for financial reform in China. There is also a chart (and links to more) showing the sources of China's economic growth.  The chart shows the degree to which growth in China has been led by investment in recent years:

New Economist: Next steps for China?: 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.

[Bloomberg report on China's fixed investment growth of 27.4 percent in the first two quarters.]