China’s Pain Points

Here are some of China’s economic pain points: bloated state-owned companies; banks with rising bad loans and local governments drowning in debt; massive overcapacity in the property market; bad investment in the wrong places. That’s just what hurts now. Here are some chronic headaches: an aging population; a wide wealth gap; a lack of innovation that could make it hard for China to improve the lives of its middle-income citizens the way it lifted hundreds of millions out of poverty; underfunded health and pension systems; environmental degradation; water shortages; corruption; rigged courts. Add to all that a roller coaster stock market and a new U.S. president who has threatened to impose trade tariffs that could prompt retaliatory measures from China. The country's leaders have already issued a raft of policies to deal with the problems arising from economic maturation. It’s not clear how far they are willing to go to fix the system — or stay out of the way and let it fix itself.

Under President Xi Jinping, China’s leaders are pushing ahead with dozens of remedies. The changes range from abandoning the one-child policy to signaling that a lower target for economic growth is sufficient to meet goals. They are also cracking down on bribe-taking and speeding up steps to make the currency more freely tradable. Altogether they constitute the biggest policy shifts since at least the 1990s. How fast the changes will come is another question. China’s reform goals were left vague when first unveiled in 2013, allowing plenty of leeway for delays and results that fall short of expectations. Two contradictory objectives have remained clear: ensuring the party’s control and right to govern, while transitioning from an economy reliant on exports and infrastructure investment to one fueled by domestic consumption and the guiding hand of the market. China’s epic stock market boom and bust in 2015 showed its leaders frantically shifting course. When the government intervened to support prices, the fiddling tarnished the idea that China is ready to relax the guiding hand of the state. Another potential challenge: Donald Trump, the newly elected U.S. president who has threatened to slap tariffs on imports from China, step up trade complaints against the country and brand it a currency manipulator after he takes office in January.