Vast unused capacity in practically every industrial sector has crippled profitability and left companies straining to repay financing.

Andy Wong, Associated Press

China's new leaders seek to avoid 'middle-income trap'

  • Article by: DAVID PIERSON
  • Los Angeles Times
  • November 10, 2012 - 5:25 PM

BEIJING - China's new leaders, set to be unveiled this week at a once-a-decade transition, will soon be handed the keys to the world's second-largest economy.

But unlike their predecessors, who embraced growth at all costs to spur the country forward, China's incoming rulers will be tasked with steering the economy toward a more sustainable path.

China must boost its private sector, reduce its reliance on low-cost exports and big-ticket public projects, and put more money into the hands of ordinary Chinese, experts said. Failure to do so could stall China in the so-called "middle-income trap" -- unable to innovate like advanced economies but too prosperous to compete with low-wage manufacturing nations.

"After 30 years of fast growth, the economy has reached a point where it is no longer sustainable," said Wang Jun, an economist at the China Center for International Economic Exchanges, a government think tank in Beijing.

Among the challenges are opening up industries dominated by heavily subsidized state-owned enterprises. China's massive trade surplus is a source of friction with the United States and other trading partners. Meanwhile, growing income inequality is straining the nation's social fabric.

China's economy grew 7.4 percent in the third quarter, the weakest growth since the aftermath of the 2008-09 financial crisis. The slowdown highlights China's vulnerability to weakness in Europe and the United States.

China's next president, Xi Jinping, and next premier, Li Keqiang, will have to lead a government that can manage expectations at a time when most Chinese are clamoring for ever higher standards of living.

"Basically, for the last 30 years it's been boom, boom and boom," said Kerry Brown, executive director of Sydney University's China Studies Center. "You have more than a generation that know nothing but boom. ... I don't know what the appetite is for being told to tighten your belts and accept more balanced growth."

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