China may yet be economy to lose sleep over

[FT_news]

Growing pressures from exploding income inequality levels pose the greatest threat to the nation's expansion, writes Kenneth Rogoff

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Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.

But so, too, is the dubious new labour law which, at least on paper, prevents companies from firing workers with 10 years or more experience. It is as if China hopes to transform itself into France. Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible