Necessary reforms for new normal in China

In the last three years, top leaders in Beijing have reiterated one message: adopting a new normal. Simply put, they want consumption, a larger service sector and more private investment. It is encouraging to see the service sector becoming the largest in the economy and there are positive anecdotes about steady household spending and innovative private companies on the rise.

However, more needs to be done before the Chinese economy enters the new normal. Consumption alone cannot keep growth at the levels desired by Beijing. One of the most crucial changes is to stop using commercial banks as policy banks to guide lending to areas with a political agenda. This has in the past led to favorable lending conditions for public investment and crowded out efficient private investment. Thus, banking and SOE reforms are necessary to help China become an innovative nation and secure future high growth, suggests Nordea Bank.