Piecing together China's economic reform jigsaw

Despite the current economic headwinds, Chinese authorities are continuing to accelerate the pace of financial reform. The recent introduction of a raft of liberalisation measures will both facilitate the currency's integration into the global economy and set the stage for long-term domestic growth.

Internationalisation of the renminbi has stolen many of the headlines, but it is only one piece in a much larger and infinitely more intricate jigsaw of economic reforms.

The largely state-controlled "socialist market economy" served China well through its first stage of industrialisation when the comparative advantage of cheap labour made investment decisions relatively simple. However, success has bred complexity.

There is much debate over whether China has passed the so-called "Lewis turning point" when a labour surplus becomes a labour shortage, but what is clear is that labour is becoming more expensive; the marginal utility of infrastructure investment is declining; and that future growth will have to come from more elusive sources of increased productivity, a grail governments have historically proved ill-equipped to find.

The new administration of President Xi Jinping and Premier Li Keqiang should be applauded for grasping the problem and recognising that introducing a greater element of market discipline into the economy - and the financial sector in particular - will be key to promoting long-term growth, even if it does come at the cost of a short-term slowdown.

"Reform is about cutting government power," Li said earlier this year. "It is a self-imposed revolution that will require real sacrifice, and it will be painful."