Chinese reforms 'will cause a recession' - but there's good news

China's economic reforms will cause short-term pain, slow its growth, hurt state-owned enterprises and make its economy more vulnerable. One day, says one of China's top economists, they will see China cause a global recession.

China's economic reforms will cause short-term pain, slow its growth, hurt state-owned enterprises and make its economy more vulnerable. One day, says one of China's top economists, they will see China cause a global recession.

But the long-term impact of the reforms will be positive, for China and the world, says Yiping Huang, professor of economics at Peking University. Its economy needs to be liberalised, and to delay another five years would put China "in deep trouble".

Professor Huang told the Australian National University's annual "China Update" that the details of "Likonomics" have yet to be spelt out. But its key planks will be to end major stimulus to the economy - unless things go wrong - force local governments and state-owned enterprises to reduce debt, and unleash wide-ranging structural reforms.

These reforms will impact on the world, he said. China will become a major consumer of other countries' production, shed low-level manufacturing and move into more sophisticated goods - and become a source of global inflation.

Speakers told the forum that China's declining workforce means its future growth rate will be lower than the target of 7.5 per cent set by former premier Wen Jiabao. The head of Treasury's China unit, Owen Freestone, said its baseline forecasts assume growth would fall to 4.5 per cent by 2020, much lower than India's and Indonesia's.

Others were more upbeat. But Dr Lu Yang, of the Chinese Academy of Social Sciences, said the workforce would decline by 30 million by 2020, cutting the sustainable growth rate to 5.5 per cent.

Professor Ross Garnaut said rising wages would force business to focus on raising productivity, and Professor Huang said financial deregulation would see banks redirect lending from state-owned enterprises to more productive private firms.

Trade Minister Richard Marles said China's transformation would be positive for Australia. "It offers enormous markets for all goods and services that Australia has to offer", he said.

Fears of Chinese investment taking over the world were also debunked. Professor Karl Sauvant, of Columbia University, said China's foreign direct investment last year was just $US84 billion out of a global total of $US1.2 trillion, and it owned just 3 per cent of the stock of foreign-owned firms.