Former U.S. Treasury Secretary Henry Paulson said, while China remains a “formidable competitor” to the U.S., its $10 trillion economy has “run out of steam and has to be rebooted,” according to the Fiscal Times.

As China prepares to launch the Asian Infrastructure Investment Bank, which many presume to be competition to the U.S.-led World Bank-International Money Fund combo, Paulson outlined his current views on the Chinese economy last week at the Smithsonian’s National Museum of American History. Paulson, a former chief executive of Goldman Sachs, presided over the 2008 fiscal crisis as the top money man for the second Bush administration.

While some accuse the U.S. of stepping back from its role as a global economic leader, Paulson said China’s economy has “run out of steam and has to be rebooted.” The Fiscal Times reported the former secretary saying, “China needs to move away from excessive dependence on exports and inefficient government investment in infrastructure that are driving up the country’s debt.”

The pathway for growth depends on China increasing domestic consumption by creating products and services to sell to Chinese citizens.

“That’s an enormous task, complicated by the fact that much of the economy remains under the thumb of central planners, even after years of reform,” Paulson said based on his experience of more than 100 trips to China over 25 years.

Paulson gave the talk to promote his new book, Dealing With China: An Insider Unmasks the New Economic Superpower.  In it, he writes, “Entrenched interests are resisting further changes. … Meantime, years of not-so-benign neglect have left the environment a near disaster that has sparked growing restiveness among China’s citizens.”

Asia Unhedged remains firmly bullish on China and the broader Asian economy, and while we might not agree with a total reboot, we agree that China has some major problems to contend with.

With other Asian economies beginning to undercut China on the cost of goods sold to developed nations, such as sneakers and clothing, China’s future relies on it succeeding on creating stuff its people can buy and afford. As a country relatively poor in energy resources and suffering from widespread pollution, solving these two problems would go a long way to continuing the country’s growth. Chinese officials have laid out a road map to expand the domestic economy, move to higher technologies and cut reliance on exports. Everything now depends on execution. But in the meantime, it just means there are a lot more value plays to find.

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