China quarterly update, November 2006
Alaimo, Veronica | Lopez, Humberto
China's key economic challenge is to rebalance the economy. The concerns about high investment and the pattern of growth have to be addressed by structural reforms. The underlying causes of high investment can be tackled through better pricing of energy, resources, land, and environmental damage; higher interest rates; limiting retained earnings by a State Owned Enterprise (SOE) dividend policy; and moderating local government incentives to pursue growth. Rebalancing the economy means a shift in production from industry towards services, more reliance on domestic demand, more equally shared growth and more environmentally sustainable growth. Besides being desirable in their own right, measures that support rebalancing are also likely to address the surging trade surplus, China's main short term macro challenge.
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