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March 16, 2013

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An economy to envy, but new leaders face challenging tasks

CHINA'S new leaders have roles as challenging as they might be enviable.

They will steer an economy that is the world's second largest and that has grown at a rate craved by most developed nations. And one with neither the debt woes of Europe nor the fiscal headaches of the United States.

However, China's potential growth rate is declining and decades of breakneck growth have produced unwanted side effects such as severe pollution and alarming inequality.

Labor shortages, a slowdown in exports as well as lower returns on capital and investment will all drag down future growth, economists say.

Party chief Xi Jinping, who was elected president on Thursday, acknowledged the country's growth was declining when he joined national legislators from Shanghai to discuss the government work report last week.

China's economy has "entered a period of single-digit growth after a relatively long period of double-digit growth," he said.

To fully tap growth potential, the new leaders are expected to instigate the broad changes that their predecessors advocated for years but were unable to fully accomplish - remaking the economy so it relies more on domestic demand, innovation and efficiency.

"China's competitive edge in the past three decades was mainly built on low costs, especially the cheap labor of rural migrant workers," said Zhang Yansheng, a researcher with the National Development and Reform Commission.

Now there are fears that the edge is not sustainable. China's working-age population dropped in 2012, the first decline in "a considerable period of time," China's statistics chief Ma Jiantang said.

"The working-age population is shrinking and this problem will get worse in the coming years," said Wang Tongsan, an economist with the Chinese Academy of Social Sciences.

Vast labor flow from China's rural inland to factories in booming coastal cities contributed to the fast growth in exports. But with China already the world's biggest exporter, there is limited room to increase its share of the global market.

The government has long called for a transformation of the development pattern to make its economy more efficient, innovation-driven and reliant on consumption.

A major priority of the new leadership should be improving the country's scientific and technological prowess to increase productivity and offset rising labor costs, Wang said.

But there are significant obstacles: an education system that values conformity more than individual innovation, a business environment that lacks protection of intellectual property rights, and a financial system that often fails to support the funding needs of private firms.






 

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