I'm not too worried about China's manufacturing slowdown. It has both structural and cyclical components.

Structurally, China is in the process of rebalancing its economy. It has had a high investment rate and dependency on exports, both of which rely on manufacturing. China is now undergoing a transformation, under which the investment rate will come down, and exports will be less important than they were in the past. The manufacturing sector is becoming less important for China.

There is also a cyclical part. It's very hard in real time to know how much of this change is a trend and how much is a business cycle. If there's too much slowdown in the manufacturing sector, and it was not replaced by consumption, then you are likely to have a cyclical downturn.

But I haven't seen too worrying numbers. There is not much risk of a hard landing in 2014. Investment has come down, but consumption seems to be quite robust. If the government follows through with reform, then it should be making a smooth transition to less reliance on investment and more reliance on consumption.

The big challenge is that producers get used to a particular model. They're used to China's exports doing well and investment being high. But now the pattern is changing and it definitely creates some adjustment costs.

There will be firms and workers who will find it quite painful, but the positive side is that the service sectors are already growing faster, and will probably grow faster in future.

Nonetheless, some modern service sectors are still relatively closed to both Chinese investment and foreign direct investment. Sectors like financial service, telecoms, logistics, and media are relatively closed in China by international standards.

In the decision adopted by the Third Plenary Session of the 18th CPC Central Committee, there was a clear statement about opening up more of the service sectors to competition from the private sector. That's a positive trend, but we need to see a detailed implementation.

Nowadays young graduates tend to go to State-owned enterprises and the government. In fact, most employment creation lies in the private sector. It seems that people don't quite trust that the private sector is going to be allowed to continuingly expand and develop. It would be good to have policies that create more space for private sector, as the confidence in private sector is a key part of the Chinese economy.

Besides, if China wants to stimulate more competition in the service sectors, it's good to have the international firms come in and compete with China's State-owned enterprises.

A lot of foreign investors have been responding to the old model. They come to China to find cheap labor and produce goods for export. Now it has become more difficult because wages are going up, and the other developing countries are moving into the market.

There are also lots of foreign firms who would like to come in and produce for China's domestic market. But in some sectors, they are kept out by China's regulations. It's in China's interests to ease up on those restrictions, getting different type of foreign investment.

Of course, the Chinese government is worried about having foreigners come in and control too much of these important sectors. It should relax and open up for competition.

Chinese State-owned firms sit there with big networks. If you open up a tiny bit in financial service for example, it will probably grow up from 1 percent to 5 to 10 percent. Based on historical experience, it's not going to grow more than that.

Foreign firms will come in and compete to find some specific areas, and encourage the Chinese firms to be more efficient. That will be a good thing for the Chinese economy and Chinese people.

The article was compiled by Global Times reporter Sun Wei based on an interview with David Dollar, senior fellow at John L.Thornton China Centre, Brookings Institution, at the recent 2014 China Development Forum held by the London School of Economics and Political Science. opinion@globaltimes.com.cn


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