A still-greater reliance on markets, particularly for allocating capital investment, would contribute to a continuation of strong economic growth. Further development of macroeconomic policy tools would also support healthy growth by keeping inflation low and by increasing economic stability. China also faces some significant risks and imbalances.
The principal risk arises from the likelihood that capital is not being allocated as efficiently as possible, the result of an undervalued exchange rate and of capital markets that, despite positive steps, remain distorted and underdeveloped. Misallocated capital will not pay the highest possible returns, leading potentially to slower growth and future financial stress.