Most investors, especially those not living in China, presume that the country’s rapid growth and global pull are proven through the gross domestic product numbers, and direct foreign investment that register with  exchange traded funds (ETFs). But China, in fact, remains divided.

The point of view that many see is off, as a new book by Yasheng Huang, a professor at Massachusetts Institute of Technology, points out that there are still two Chinas: one, from not so long ago, vibrant, entrepreneurial and rural; the other, today’s China, urban and controlled by the state, reports The Economist.

Although China quickly sprouted skyscrapers and foreign investment grew, this all came at a price. As the state reversed course, taxing the countryside to finance urban development, growth in average household income and poverty eradication slowed while income differences and social tensions grew stronger.

According to Huang, the worst weaknesses of China’s state-led capitalism is a reliance on outdated state companies rather than more efficient private ones, a weak financial sector, pollution and rampant corruption—are increasingly distorting the economy.

Evidence of an emerging and healthy private economy is starting to show, but the repression of the poorest and weakest rural provinces must be stopped first, and that is not likely under the current regime.

The iShares FTSE/Xinhua China 25 Index (FXI) is down 49.3% year-to-date.

Tags: Asia, China, Emerging Markets, FXI

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