Sustaining China's Economic Growth after the Global Financial Crisis In 2004, Beijing announced a big shift in the country's economic model. No longer would it rely on investment and exports. In­stead, consumers would lead the way. As Premier Wen Jiabao said later, growth had become "unsteady, unbalanced, unco-ordinated and unsustainable" - a danger to China and the world. But something went wrong. Despite repeated pledges and policies to achieve rebalancing, the Chinese economy swerved in the opposite direction. Nicholas Lardy, an economist who began writing about China when Mao Zedong ruled four decades ago, examines in his latest book why, and what can be done to fix it. IN Books That China needs fixing might seem odd. While other nations are mired in crisis, the Chinese economy expanded by 9.2 per cent last year and the government is in rude fiscal health. Lardy shines a light on the cracks. His book is a useful corrective to both the triumphalism increasingly heard in Beijing and the predictions of imminent collapse heard abroad. But it is dense. Introducing one chapter, he candidly warns it is "dry and technical yet important" - a fitting description of the book as a whole. In the 1990s China was a typical emerging market, albeit one of a colossal size. From 2003, though, it became "a conspicuous exception." Trade surpluses soared, investment surged and the central bank engaged in unprecedented intervention to keep the renminbi from appreciating. The problems are clear if China remains on the same path. It will harm other economies, especially the US and Europe, with its exporters eroding growth prospects. Longer term, its dysfunctions could culminate in a sharp slowdown. The imbalances are most apparent in two facts that are drearily familiar to China-watchers but bear repeating. Personal consumption as a share of the economy fell from 46 per cent in the 1990s to about 35 per cent today. Japan, South Korea and Taiwan barely dipped below 50 per cent in their high-growth stages of development. The flipside of record-low consumption is record-high investment. Beijing can be proud of its airports and highways, but empty property across the country is evidence of capital misallocation on a grand scale. The second is China's foreign currency reserves. At $3.2tn, they are three times bigger than Japan's, the world's second largest, and often seen as a sign of strength. On the contrary, the reserves are so huge that the government can put only a small portion to productive use abroad. And their size is a measure of the indirect tax the central bank inflicts on households to hold the renminbi down. So what is the solution? The economics are straightforward: boost consumption and reduce investment. A blueprint to do so has been in place for nearly a decade. The hard part is mustering the political will. The government is not entirely sitting on its hands. It has begun constructing a welfare state, trying to get people to save less and spend more. By 2009 basic medical insurance in rural areas covered 833m citizens,10 times the number five years earlier. Yet social programmes are only a partial cure. What really ails the economy is not excessive saving for medical care or schooling but rather insufficient income. A decline in personal income relative to overall growth accounts for about three-quarters of China's imbalances. Beijing has mandated higher minimum wages, but it will take more than that to raise income levels. Lardy pinpoints interest rates as the crucial lever for reform. The government keeps deposit rates artificially low. Since 2003 savers have lost money in the banking system as inflation has outstripped interest. Many people have instead decided that owning multiple homes is a better way to store wealth. With funding so cheap, companies have embarked on capital-heavy investment, which has restrained employment growth and so further stunted incomes. But giving market forces sway over interest rates could erode banks" profitability and undermine the government's cash injections that made them solvent just a few years ago. So the banks and their ultimate owner - the finance ministry - are resistant. Lardy also shows that, before interest rates are set free, China must make its exchange rate more flexible to prevent the central bank coming under intolerable pressure. However, exporters and the commerce ministry oppose real currency reform. The one argument that should prevail is that the cost of inaction will only rise. Even if that is hardly carrying the day in debt debates in Europe or the US, China is unencumbered by the democratic process. Yet as Lardy lucidly if dryly outlines, stalled reforms reveal that Beijing's consensus-driven leadership is also reluctant to confront inconvenient truths. The writer is an FT correspondent in Beijing