A train runs past newly-built residential buildings in Shenyang, Liaoning province on July 18, 2011.SHENG LI
Jamil Anderlini is deputy Beijing bureau chief for the FT
China's economic development "suffers from a serious lack of balance, co-ordination and sustainability".
Those are not the words of an ultra-bearish hedge fund manager. They come from a speech delivered three weeks ago by Chinese President Hu Jintao and they show that the ruling Communist Party understands better than anyone the momentous challenges it faces in managing the world's second-largest economy.
It is always strange to hear foreign analysts and fund managers who are far more bullish on China than the people who run it but with developed markets engulfed in various crises, the Chinese economy has become the great hope for much of the rest of the world.
Central to the bullish argument is an almost religious belief in the power of Chinese urbanization.
When China bulls are asked who they think is going to buy all the shiny new apartments springing up across the country, the inevitable answer is all those newly urbanized peasant farmers.
On paper, China has experienced rapid urbanization over the past two decades, with the portion of the population living in cities leaping from 26.4 per cent in 1990 to 49.7 per cent last year.
Over that time, more than 270 million rural residents moved into urban areas, an average of about 13 million a year.
But what these figures don't tell you is that more than 150 million of those people are still regarded as members of the "floating population" and their movement into the cities is actually easily reversible urbanization.
One major barrier to them settling down permanently is China's "hukou" or "household registration" system, which grants hereditary residence rights and classes all citizens as either urban or rural.
Under this system, rural migrants mostly have no access to urban services, including healthcare, education, pensions or other social security benefits and these days they are mostly not allowed to buy property in the big cities even if they could afford it.
They live in dormitories, shanty towns or other temporary housing and they have little stake in the new cities they have helped to build.
The hukou system has been a key ingredient in China's economic model, by creating an underclass to provide the cheap labour that fuels rapid growth.
Despite government talk of reforming and loosening the hukou system it has actually been getting stricter in big overcrowded cities, which refuse to hand out hukou permits to all but the most desirable, well-educated and wealthy residents.
In China, the state officially owns all land and in the countryside it is very difficult for peasant farmers to sell or trade the family plots they lease from the government or the local collective.
This means that rural migrants retain strong links to the land and if they lose their jobs they are unlikely to hang around in the cities and instead return to till their fields, which provide their ultimate social safety net.
Chinese policymakers have nightmares about what would happen if they were to abolish the hukou system and privatize land in the countryside. They point out that the only reason China doesn't have huge populations of landless peasants flooding the cities and living in slums (as seen in most other large developing country like India, Indonesia, Brazil etc.) is because they retain tight control over this two-tier social structure.
At the same time, thanks to policies introduced by Mr. Hu and his administration over the last decade, life in the countryside is nowhere near as bad as it used to be. In the past few years, the government has cancelled the millennia-old agriculture tax, improved social services for rural areas and poured hundreds of billions of renminbi into developing rural infrastructure.
Labour shortages are already showing up in key manufacturing regions as rural citizens choose to stay home rather than migrate to find dirty and dangerous work in the factory boomtowns.
China's urbanization rate is still roughly at the same level as that in the U.S. a hundred years ago and it is likely that it will go up over the long term.
But this process will not match the straight-line graphs so beloved of bullish analysts and investors and continued urbanization relies heavily on some very difficult policy decisions that Beijing is currently unwilling to make.