For the Chinese economy the 2012 could be a critical year for more risk’s factors could compound: 1) excessive dependency from a stagnating global demand but also unstable change (see the euro area and United States); 2) publics investments who are revealing themselves expensive and inefficient; 3) a banking system exposed towards indebted local governments from which 23% of these loans could turn out uncollectable; 4) the widening of income differentials and opportunities and the resulting increase in social unrest. On the long period looms the population aging as the speed of the demographic transition will hinder the creation of universal welfare systems: the shift from savings to consumption could turn out smaller than expected and the market of domestic consumers less wide than hoped. It will be up to the " fifth generation " of political leaders to allow the transition towards a model of sustainable development for China.

However, it is more than likely that the main driver of the interchange, to say the growth of the Chinese economic system, undergoes a sharp deceleration in the near future and then resume at a rapid but lower than before pace, and will continue to decline from decade to decade.

The critical juncture is the transition from a no longer sustainable model of growth led by export (and investment) towards a more balanced growth model dependent on all the elements of domestic demand. But such a step, which involves the activation of the other component of domestic demand, to say the private consumption that declined in share from a maximum of more than 50% of GDP in the early '80s to the current 35%, it may be difficult and only partially feasible.

Evidences to support the scenario of abrupt deceleration followed by a recovery but on a lower growth path are  found both in the short-term economic situation, both in a number of important structural constraints related to the medium-long term growth.

As for the short term, there are several signs of stress and, according to some analysts, 2012 could be the year of the '"hard lending", because of the failure of one or some of the elements that have so far acted as a driving force and the actualization of some risk factors.

The 2012 may in fact be a critical year for the combination of several weaknesses factors: i) the excessive dependence on external demand, together with the trend of deteriorating terms of trade (export prices growth well below the import prices) and the low ranking in terms of innovation and technology of companies that are not owned / controlled by foreign capital, makes the economy vulnerable both to a global demand changing and unstable with regard to the breakdown and geo-economic axis  (see the euro area and the United States) and with respect to exogenous shocks in the prices of energy and non-energy commodities; ii) public investment that have started in late 2008 as part of the largest anti-crisis plan in the world (a stimulus package of just under 600 billion dollars) have guaranteed growth rates just slightly lower than the pre- crisis rates, but are proving to be costly and inefficient in terms of both allocation and expected returns;iii) a banking system exposed to local authorities debt through the so-called " Local Governments Investment Vehicles" from which about 23% of the total volume of these loans - equal to about 30% of the total volume of loans-would be non-performing loans (NPL); v) the widening of income differentials and opportunities, in particular the increase in relative poverty in rural areas in contrast with the provinces on the east coast from Tianjin in Guangdong, and the resulting increase in social unrest.

But in the long term also an aging population looms, coupled with the decreasing trend of the labor force: it will only take 25 years (100-140 years have been required in the western European countries) for the doubling of the over-64, to say the retired, and in less than 4 decades the over 80-year-olds will reach 100 million, while in 2016 will begin the slow but steady decline of the working population (15-64 years), from which an increase in health care and welfare costs for which resources will need to be found and whose costs will be borne by the declining working population (increase in the dependency ratio).

The speed of demographic transition could therefore hinder, so constituting an element of pressure on the resources, the creation of an universal (or however with extended coverage) social security and social care systems, constraining the Chinese families, in the absence of a structural increase in the national income share of salaries, to allocate a significant share of their income into savings for pensions and medical care. Consequently this national income distributional shift, also present as a goal in the 2011-2015 Five-Year Plan, of households income from savings to consumption may be lower than expected and the increase in domestic demand ("the Chinese consumer market") less extensive than expected.

There are currently time and resources, therefore opportunities, to set a number of key structural reforms to address these risks. The reforms in particular should address: the redistributive policy that has to allocate differently, as noted by Francoise Lemoine of CEPII, the gains of growth among regions, sectors and social groups;  a wage policy that together with the redistributive policy favors and does not discriminate against families; the extension of social protection system and health insurance which, as mentioned earlier, account at the moment for one fifth of the population; a reform of the financial and banking sector, now strongly biased toward public investment and state enterprises encouraging, together with other policies that would address the problem of the "two tier" economy, the technological recovery by those Chinese companies not included in the international division of labor through FDI and / or control by foreign companies.

However, more or less all these reforms are going to change the complex balance of power that explicit s also in the "non-virtuous" control  of many socio-economic dynamics due to the widespread presence of the state economy. Much will depend on the so called "fifth generation" of leaders who will be appointed this autumn (2012) during the congress of the Communist Party and its political will and capacity in an economy background that may now be stated quite tricky.

Prepared by the Analysis Group.

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