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Reform Remains Difficult

The weak banking reforms were just one sign of the broader difficulties in implementing meaningful reforms against all forms of corruption. Although ambitious efforts began in the mid-2010s to root out a variety of forms of corruption, sustaining momentum proved too difficult politically. The problems of corruption proved to be more a consequence of structural incentives than of individual malfeasance, and the anticorruption campaign grew to be seen as a politically motivated rather than a sincere attempt to reduce corruption. Some corrupt business people were savvy enough to ensure that they were not targeted, thus limiting the campaign's effectiveness.

As corruption had grown to the point at which it was threatening economic efficiency, foreign investors were less willing to invest in China, especially given that other developing countries were cleaning up their own acts. Enforcement of intellectual property rights has remained weak, and several well-publicized cases involved Australian and U.S. firms going bankrupt as Chinese competitors undercut them with stolen ideas for new products. In other cases, Chinese regulatory authorities pursued Western firms on questionable charges of anticompetitive practices and other alleged illegal business activities, and the nature of the Chinese legal system made it difficult for firms to defend themselves.

Because the government did not sufficiently tackle the problem of banks making loans to less-productive industries, government spending on infrastructure continues to be high. The government still looks to infrastructure spending for a stimulus effect, although its impact is quite modest given that overcapacity plagues many sectors. However, spending on transportation infrastructure is down because environmental problems are considered more pressing. Much government spending has shifted focus, and the transportation sector receives only 2 percent of GDP.

The government also did not achieve major changes in retirement and health care policies, even though there had been some attempts to initiate such reforms. Although an initial phase of health care reform was announced in 2009, the reforms stalled. As a result, people continued to save large amounts in regular banks, which were safer but still carried low interest rates. Although people expressed concern about the safety of their bank deposits, they had few other choices for long-term savings. The overall saving rate declined as the population aged and older people drew down their savings for living expenses.

After one year with only 2 percent growth (far lower than during the global financial crisis of 2008), GDP growth rebounded to about 3 to 4 percent annually through the mid-2020s and rose to about 5 percent by 2030. This rebound was attributed to efforts undertaken after the crisis to focus more on the sectors of the economy that support growth in consumer demand. This was not immediately successful. The problems in the banking sector and what felt like a recession sufficiently spooked the Chinese population that consumer spending remained low through the early 2020s, making rebalancing the economy and getting away from reliance on investment difficult during that period. However, during the past five years, spending has improved, and the overall economy with it.

The share of the economy in the eastern region has gradually declined to about 40 to 45 percent, down from roughly half in the early 2010s. Declines in the export share of inexpensive factory goods have made fewer jobs available, and lower housing prices in other regions have lured many previous migrants back, while others who might have left for jobs on the east coast stayed put and found jobs locally. The eastern region could not shift quickly to a more white-collar economic base. Businesses in these service sectors lacked access to capital to grow, in part because reforms in the banking sector were not fully realized and smaller firms still had difficulties getting loans.

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