Maybe China shouldn't open up just yet

CHINA needs reform. This has long been the consensus advice from economists and multilateral institutions such as the World Bank, whose recent "China 2030" report argues that Chinese leaders should strengthen the role of markets and liberalise legal, financial and other institutions governing the economy. Their to-do list is virtually gospel by now: free up trade and investment, unshackle the exchange rate and ease capital controls.

Such reforms are held not only to be worthy in themselves, but critical to solving China's biggest problem: its debt, which has skyrocketed to well over 260 per cent of GDP from 162 per cent in 2008. The speed and scale of credit expansion has raised fears of a financial crisis, even from such normally staid figures as central bank governor Zhou Xiaochuan. The hope is that reforms will boost productivity enough to allow China to outgrow its debt burden before that crisis hits.

This logic is flawed for two reasons. First, China is unlikely to suffer a financial crisis, and this is precisely because of the government's ability to restructure banking-sector liabilities at will.