Three Big Dangers Facing China's Economy

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Second, there is a danger that China's state-owned enterprises will re-emerge to dominate the country's economy. In truth, the state-owned sector saved China's economy during the financial crisis. Large state-owned banks like Bank of China and ICBC pumped liquidity into the system and rolled over loans, unlike in America, where JPMorgan and Citigroup ( C - news - people ) stopped lending and started foreclosing too much, destroying consumer confidence. Large Chinese companies promised not to lay off employees even if it cut into their profits. Such actions by the state-owned sector boosted business and consumer confidence in a way that low interest rates never could.

But no country's economy can be sustained in the long term by its state-owned businesses, and China is in danger of allowing state-owned firms to creep back to too much power in its economy after a long period of retreat. Most of those companies are lumbering, bureaucratic engines of inefficiency, driven more by politics than profit, and it will not be good if they are the ones responsible for propping up growth.

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In the two decades before the financial crisis, 60% of new jobs in America were created by companies with fewer than 50 employees. More than 9 million Americans submitted their taxes as S corporations in 2008. In China, there is no equivalent of an S corporation.

Unlike in the U.S., where you can start a business out of your garage, as the founders of Hewlett-Packard ( HPQ - news - people ) did, in China you can't start up without first renting an official office and getting approvals from different ministries. Not only can navigating the bureaucracy take several months, but this increases entrepreneurs' financial risk. Far too many have to invest large amounts of capital up front to get an office and hire legal help before their business model is even tested.

Furthermore, new human resource laws implemented in the beginning of 2008 make it costlier to fire workers. As a result, companies are hesitant to add employees to their payrolls and can't hire short-term contract workers for more than a short fixed period.

China's economy remains strong, but the next six months will be rocky, as perils with the renminbi, the election season in the U.S. and a reinvigorated state-run sector threaten the country's long-term economic growth.

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It looks more that the USA is playing with its currency, over-printing 24/7 and still has the same exchange rate? Currently the USA has 50+ non-manufacturing jobs for each 1 manufacturing job - th

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Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. Follow him on Twitter@shaunrein.