A woman, whose child died from drinking tainted milk, holds a sign outside Shijiazhuang Intermediate People's Court
A woman whose child died from drinking tainted milk holds a sign outside a court in Shijiazhuang, China, to protest lax industrial controls. Reuters

China's economic growth may soon hit a wall due to problems stemming from corruption and fraud, according to independent economist Andy Xie.

For example, the Chinese market for Chateau Lafite Rothschild has been damaged by a flood of authentic-looking counterfeits of the famed French wine, Xie writes in a commentary for financial-news website Caixin.

When fakes are so pervasive, consumers shy away. ... The country's rich and powerful no longer brag about drinking Lafite, fearing they will appear foolish, Xie notes.

Meanwhile, ordinary Chinese consumers struggle with fraud in the form of soup spiked with chemicals, meat pumped with excessive hormones, bottled water that's really from the tap and milk full of toxic melamine.

Such rampant fraud in the consumer market -- Xie blames lax and corrupt law enforcement for the problem -- holds back consumption.

More importantly, it rewards bad businesses -- those that are inefficient, low-quality and backward. Indeed, business success in China is often divorced from market influences.

Take the restaurant business, for example.

In China, securing a good location might be a matter of having the right political connections rather than having good credit. Passing health inspections could be due to lining up the right inspectors rather than observing sound hygiene and storage practices.

Political factors trump economic ones in China, Xie writes.

Unfortunately, people who are good at securing connections usually aren't adept at actually providing high-quality products and services, he adds.

Some may point out that China's annual growth rate has averaged over 9 percent for the past two decades. But Xie counters that this performance is largely the result of macroeconomic improvements, which can go only so far unless matched on a microeconomic scale.

Any economic system is judged by how efficiently it allocates resources. Efficient use, as measured at the macro level, is important, but success also requires efficiency at the micro level -- where the real economy operates.

Before the economic boom under Deng Xiaoping's leadership, China had a surplus of cheap labor and coal and the global market -- specifically the United States -- had robust consumer demand.

To take advantage of those conditions, the Chinese government implemented changes in infrastructure, deregulation, privatization, decentralization, attraction of foreign investment and getting foreign markets open for Chinese exports.

But these improvements, which can be largely unlocked by macroeconomic policy, may have hit a wall.

Energy shortages will remain acute for the next decade, Xie believes, as Western economies no longer consume as much and China feels the impact of a structural labor shortage stemming, in part, to three decades of the one-child policy.

Qing Wang, Morgan Stanley's chief economist for greater China, notes that the unit labor cost in the Chinese industrial sector has grown since 2004, which represents the beginning of the end of surplus labor supply in China.

Since then, seasonal labor shortages, especially in coastal areas (especially around the Chinese New Year) have become the norm, instead of the exception, he writes.

For its economy to keep growing, China must take the next step, which includes improving areas such as the rule of law and market-based resource allocation.

The goal isn't just growth, which Chinese authorities have been accused of targeting at the expense of improved quality of life for the country's people. Higher living standards should, of course, be the ultimate mission of a government. But in China, quality of life is not compatible with ... economic development, writes Xie.

Chinese consumers literally risk their lives the moment they consume something, he adds.

China's explosive growth during the past few decades has shaken the belief that the West's market-driven system is superior to China's state capitalism. But if that growth stalls, the market approach, despites its flaws, will reclaim the undisputed title of preferred economic model.

China