When turning on the television in the morning, one will no doubt catch glaring reminders that the world is entrenched in economic turmoil. The geopolitical chessboard will forever be reshaped, cast now in a multipolar mould. Christer Ljungwall has written an important analysis of China’s role in this new landscape, specifically pointing out that the basic weaknesses in China’s financial system will oppress economic growth through their adverse effect on the efficiency of resource distribution, in turn affecting foreign investment strategy with emerging economies.

International comparisons document China’s achievements being unprecedented. In the nation’s first decades of reform there was significant growth in real GDP, and it is only in recent years that fluctuations have moderated.

The international conditions that so far have been supporting China’s economic growth are now looking increasingly unfavorable. Until recently, the Chinese government has held tight to the hypothesis of decoupling, for instance, China is unlikely to be severely affected by the unfavorable world economic prospects. But in line with a rapidly deteriorating economic environment in the United States, Europe, Japan, and as less industrialized parts of world, Chinese observers are rapidly changing their views on this matter. China’s real economy is integrated into the world economy via extensive trade and FDI links, and can thus not escape the world economic downturn.

Despite sweeping reforms, Chinas financial system is not yet developed according to the standards of industrialized countries. Policy distortions with respect to China’s SOB (state-owned bank) dominated financial system have led to deficiencies in the tools available to handle different types of crises. The magnitude and implications of potential risks suggests that further financial market reform and development is a key priority for China to achieve its potential. Building a broader-based, well functioning financial market would also help to rebalance China’s economy by shifting domestic demand away from heavy reliance on investment toward consumption. A failure to shift in this direction will weaken the financial system and oppress Chinas economic growth through an adverse effect on the supply of savings and efficiency of resource allocation. The current situation is grim and the outcome of the next 1–3 years is difficult to predict. But this also presents China with an opportunity to analyze its problems, reflect about its weaknesses and which areas they should focus their efforts. 

Perspectives on Economic Growth and Stability in China prescribes for the nation a need for further economic integration with the world market and stronger clarity within their financial system. Their current links to the world economy bode unwell for short-term prosperity, but investment in emerging markets turned multipolar leaders such as Brazil and indeed with markets who will appreciate enhanced trade in their own respective tenures of currency devaluation, such as Russia could prove interesting strategies China could implement going forward from Ljungwall’s analysis.