After 20 years of breathtaking growth and massive industrialization, China is now facing economic and social challenges to its sustained development.
On the one hand, it must find 12 trillion renminbi ($1.5 trillion) over the next five years1 to finance the construction of a staggering amount of physical infrastructure if it is to keep its growth on track and extend economic development to smaller cities and rural areas. On the other, it must address increasingly pressing issues of social harmony and stability, in part by tackling shortfalls in its pension and social-welfare systems. Both of these efforts will be crucial for narrowing the potentially explosive gap between the wealthier coastal and urban regions and the poorer countryside.
Since either undertaking—let alone both—will almost certainly cost more than the government can afford, China must mobilize a market-oriented source of finance to expand its investment capacity without compromising fiscal discipline. It could do so, at least in part, by further reforming the Chinese life insurance market.
A vibrant life insurance2 industry is uniquely suited to address infrastructure and social needs alike. By redirecting China's enormous household savings, now held largely in short-term bank accounts, into life insurance products, insurers could...