Over the last few weeks the political and economic turmoil that is unfolding in China is creating quit a stir. While many books and articles have predicted an impending political and economic crisis in China, the recent events are only reinforcing this view.

Probably most of the doomsday predictions may never come true. It is in the interest of nobody that the world’s second largest economy is heading to a roadblock.

The dilemma here is that structural changes needed in the economy will have a significant impact on the social and political system in China. The Chinese Communist Party is simply not ready for any such upheaval.

1. China’s State Owned Enterprises (SOEs) are crowding out private investments. They get preferential access to household savings from state owned banks at low interest rates. The result is inefficiency, stymied innovation and low return per unit of capital invested. To make matters worse SOEs are headed by powerful princelings who are members of Chinese Communist Party and no one can touch them.

2. For long, the Chinese economy is dependent upon its exports and infrastructure to boost the growth rate. Both these factors contribute more than 80% of growth in the economy – something not seen in any large economy in the world. The furious rate at which infrastructure is built up has reached saturation point with negligible economic return from future spending. Exports have taken a hit as well with the troubles in Euro and US

3. China’s efforts to boost domestic consumption for economic growth are not helping much either. Anticipating higher inflation and no social security net to bank upon, Chinese are simply hoarding whatever savings they could. Unfortunately the households have no where to go but park their money in the banks at negative real interest rates.

4. It is suspected that the reckless spending in building unproductive assets is wrecking the Chinese banking system. There are chances of a bubble in the banking systems that can burst any time and make the central bank prop up the balance sheets with huge cost to the tax payers.

No one has a silver bullet to resolve all the issues and nobody in the party wants to rock the boat in the middle of once-in-a-decade political transition. China’s problems are more social or political in nature which makes them even harder to resolve. Let us hope for the best.