As an economy advances and becomes more complex, the financial system plays an increasingly important role in properly allocating capital and labor to accommodate later stages of economic development. China's financial system, however, has failed to keep pace with its economic growth and increasing degrees of systemic complexity, as evidenced by the country's inefficient stock markets, overreliance on real estate investments, and overfunding of bloated state-owned enterprises. Without changes that increase high-productivity capital growth, China's inflexible financial structure will continue to impede its economic development, as well as its leaders' ability to offset the impending fallout from the country's population decline. There is no existing model for China's predicament, but certain economic fundamentals will have outsized impacts on whether Asia’s largest economy can escape the middle-income trap in the face of mounting systematic and demographic challenges. ...
