China must address 'structural weakness'

The Adelaide-based chairman of Chinese homewares manufacturer Thomas Bryson International said changes needed to be made to China's banking sector and spending prerogatives to ensure it maintained its growth levels.

"The private sector has historically struggled to obtain credit from the banking sector (because) the State-owned Commercial Banks (SOCBs) have preferred to lend to mainly state-owned companies," he told this month's Sino-Australian Economic Cooperation Forum at Tianjin.

"The actual profitability of the SOCBs is likely to be worse than disclosed mainly due to lax loan provisioning and interest accrual standards.

"Reform is required to aggressively tackle the banking sector's lending biases and channel more credit to dynamic small and medium-sized enterprises."

As the world's second-largest economy struggled to cope with its loss of competitive advantage  as Vietnam, Cambodia and Bangladesh offered cheaper labour for manufacturers it also needed to cut back on public investment levels, Dr Sexton said.

"There is a risk that China's demand cannot keep up with the supply being created by over-investment in productive capacity," he said.

"The government's response to date has been to invest more funds into new projects. The effect is to create even more oversupply.

"This is an unsustainable situation that has been concealed by ever-increasing net exports and obscured by the global financial crisis stimulus."

Dr Sexton is the founder of investment bank Beston Pacific Asset Management and a former chair of South Australia's Venture Capital Board.

He said China needed to refocus its trade attention to ensure continued growth.

"Policy makers need to wean China off the 'growth biscuit' of a rising trade surplus on the back of economic growth in other countries and replace it with a diet more focused on domestic consumption in its own country.

"It also need to move towards a freely-floated Chinese Yuan.

"If these adjustments can occur along with the continuing growth of the Chinese economy, it will only be a matter of time before China is not only the world's number one economy, but also has the world's dominant currency."