Basically, there is 'old China', capital intensive, mostly state-owned smokestack industries, highly leveraged, based on export, industry and investment. The new China is more focuseed on technology, innovation, services, consumer spending.
The problems mostly lie in 'old China'; overleveraged, overcapacity, falling prices (really not what you want when you have excess capacity and are overleveraged) and the authorities are trying to make the transition from old to new China as smooth as possible.
What should be done is fairly easy, much of the overcapacity should be rationalized, and much of the related dubious debts should be written off. But this is a rather brute process, as it will make millions redundant, something which the authorities are reluctant to embark upon.
The chosen path, rollover of credit and keeping it cheap creates a bit of a zombie economy, we know that from Japan in the 1990s. Companies and (shadow) banks persist, but they're not really viable or embark on new activities. Basically it's more difficult to have creation with at least some destruction. Old China is weighing all of China down.
One idea that could work is to extent China's social safety net, this would kill two birds with one stone:
- It would reduce the exhorbitant household saving rate which is a drag on demand, especially now that old China needs a lot less investment
- It would make the rationalization of old China more bearable for those involved, smoothing the transition.
The Chinese safety net leaves much to be desired:
The problems in China’s social security system can be traced back to two key events: The break-up of the state-run economy, which had provided urban workers with an “iron rice bowl” (employment, housing, healthcare and pension), and the introduction of the one-child policy in the 1980s, which meant that parents could no longer rely on a large extended family to look after them in their old age. In other words, as the economy developed and liberalized in the 1990s and 2000s, both the state and social structures that had supported workers in their old age, ill-health and during times of economic hardship gradually vanished, leaving a huge vacuum to fill.
Pensions:
Despite government attempts to increase pension and other social insurance coverage, the majority of workers still lack an effective welfare safety net. Official figures show that in 2013, only 242 million workers, less than one third of China’s total workforce of around 770 million, had a basic pension.
Piecemeal reform culminating in the 2011 Social Insurance Law outsorced much of the safety net to the employment contract:
Both employers and employees are required to make contributions (at different rates) to a pension fund, unemployment insurance fund and medical insurance fund, as well as the Housing Provident Fund. Employers, but not employees, are also required to contribute to the work-related injury and maternity insurance funds.
But there are also local funds:
The various insurance funds are managed by local governments and are pooled into provincial or municipal funds. Usually it is the local labour or human resources and social insurance departments that manage the social insurance funds, while the Housing Provident Fund is managed by the local government’s Housing Provident Fund Management Committee.
However, the institutional make-up of this creates a rather fragmented system, which can work as a barrier to labor mobility:
Social insurance benefits should remain with workers when they move. However this provision has proved very difficult to implement because of the highly localized nature of the social welfare system in China. Getting different jurisdictions to share information is fraught with bureaucratic and technical difficulties, especially for workers coming from rural areas of China.