CAPITAL DILEMMA ANDY XIE Why high-speed growth won't solve China's financial problems China's economic boom has been fuelled by exports, high savings, and a flood of foreign investment. But it has come with a host of problems, starting with China's ailing.

(From South China Morning Post)

Many inside China argue that high-speed growth is the solution to the weakness of its financial sector. Yet unless the government makes a conscientious decision to loosen its controls over capital, change will come only with a financial crisis such as we saw in South Korea in 1997.

China's economy booms even while return on capital remains low outside the export sector. Returns are low because of the continued dominance of the state, which remains relatively indifferent to the efficient allocation of capital. China's outstanding export performance increases domestic liquidity, which ends up under the control of the state sector, through state banks and the stock market.

China probably accounts for more than one-third of net capital …