China moving up to the next level

Slew of reforms ushered in by new government will have a multiplier effect on economic growth

A friend gave me a copy of the book China Airborne by James Fallows. The author was based in China during 2006 to 2009 as a correspondent for the US monthly magazine The Atlantic. Although, as the title suggests, the book's specific subject is China's entry - as a major user and would-be manufacturer - into the modern aerospace industry, the book is really about something else: the nature of China's rise since 1980 and the challenges the country faces as it becomes one of the world's two superpowers.

The book salutes China's remarkable achievements, while documenting the inefficiencies and contradictions of the Chinese growth model. It has been hailed by reviewers as the best inside story yet of modern China.

Fallows describes a China where the incredible happens, but where the State exercises controls over vast swaths of the economy and blind over-investment proliferates. But Fallows describes a China that is passing from our sight, even though the book was published less than two years ago.

The reason is because, since last year, something big and new has happened in China. A new government is in place, with a clear mission to introduce fundamental reform to China's economy and society. Last November, the day after the Party announced a reform program at the third plenum in Beijing, I delivered a lunchtime keynote address at a conference in Shanghai.

Earlier that day, equities on the Chinese capital market had fallen, because investors had not digested the full consequences of the reform program announced in outline the day before. But a week after my talk, once the analysts had read carefully between the lines and decided that the government was determined to introduce fundamental change, the stock market had risen by 10 percent.

Since November, much evidence has emerged that China is about to change fundamentally.

The establishment of the Shanghai free trade zone will bring banking free market practices to China, because its impact will spread from Shanghai to the rest of China's financial sector.

December's announcement that the government would license 11 private companies as cellular telephone service providers, in competition with the three main operators - China Mobile Ltd, China United Network Communications Group Co Ltd and China Telecom Corp Ltd - introduced a strong element of free market competition into the cellular phone market.

The recent announcement that private companies in China will be permitted to start banks will provide more competition in China's banking sector, particularly in the vital sector of small and medium-sized businesses, where loan capital and banking services have been thin on the ground. Other big changes are on the way, such as the full deregulation of interest rates.

The impact of deregulation and more competition in the telecom and banking sectors, within a clear and well-founded regulatory system, will change China's economy for the better in several important ways.

Deepening reforms can help China tackle challenges	Timetable for reform