Reforms or face a crisis, China told

China could face an economic crisis unless it pushes its reforms to a much deeper level given its growth model, the World Bank warned yesterday in a report that also urged it to reduce the dominance of state-owned companies and promote free markets to achieve its goal of becoming a high-income society.

China's sizzling economic growth over the past 30 years has come to a point where it is prone to an abrupt slowdown without any warning signs, a case of the "middle-income trap" encountered by many emerging economies, the report said.

A sudden slowdown could worsen inherent problems affecting the banking sector and other industries and even bring about an economic crisis in the world's second-largest economy, the report said.

The report's emphasis on curbing state-owned businesses clashes with China's strategy over the past decade of building government-owned champions in fields from banking to technology and is likely to provoke opposition. "As China's leaders know, the country's current economic growth model is unsustainable," said World Bank President Robert Zoellick at a conference about the report, co-authored with a Chinese Cabinet think tank, the Development Research Center. China has reached a "turning point" and needs to "redefine the role of the state," Zoellick said.

The report highlights the fact that after three decades of reforms which allowed Chinese entrepreneurs to become world leaders in export-driven manufacturing, state companies still controll domestic industries from steel and airlines to oil and telecommunications.

Government companies are supported by low-cost credit from state banks and business groups complain regulators shield them from foreign and private competitors despite China's market-opening pledges.

By adopting a new growth strategy, China will increase its stake to become the world's largest economy before 2030, the report said.

In "China 2030," the Washington-based bank said China should complete its transition to a market economy - through enterprise, land, labor and financial sector reform - strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity.

Zoellick added: "The case for reform is compelling because China has now reached a turning point in its development path. Managing the transition from a middle-income to a high-income country will prove challenging; add to this a global environment that will likely remain uncertain and volatile for the foreseeable future and the need for change assumes even greater importance."

The report highlights six strategic directions for China's future: completing the transition to a market economy; accelerating the pace of open innovation; going "green" to transform environmental stresses into green growth as a driver for development; expanding opportunities and services such as health, education and access to jobs for all; modernizing and strengthening the domestic fiscal system; and seeking mutually beneficial relations with the world.

China released its 12th Five-Year Plan (2011-2015) last year, which stressed that domestic demand should become a new engine of economic growth. "The 12th Five-Year Plan provides an excellent start," the report said.

"Central to all findings is the need for China to modernize its domestic financial base and move to a public financial system - at all levels of government - that's transparent and accountable, overseen by fewer but stronger institutions, to help fund a changing economic, environmental and social agenda," it added.