TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Minxin Pei argues China is having difficulty transitioning to a more consumer-based economy because doing business in China is excruciatingly difficult:

But there is another explanation for China’s excessive export dependence, one that has more to do with the country’s poor political and economic institutions. Specifically, export dependence partly reflects the high degree of difficulty of doing business in China. Official corruption, insecure property rights, stifling regulatory restraints, weak payment discipline, poor logistics and distribution, widespread counterfeiting, and vulnerability to other forms of intellectual-property theft: all of these obstacles increase transaction costs and make it difficult for entrepreneurs to thrive in domestic markets.

By contrast, if China’s private firms sell to Western multinationals, such as Wal-Mart, Target, or Home Depot, they do not have to worry about getting paid. They can avoid all of the headaches that they would have encountered at home, because well-established economic institutions and business practices in their export markets protect their interests and greatly reduce transaction costs.

Solving this will require implementing the rule of law, rather than China’s autocratic, CCP-controlled system. As Pei argues, though, doing so will require the party to give up control of the state and society. Unless something dramatic changes, the CCP has no easy decision to make. China’s future could require them to lessen their grip, but their own future would be put in question.