Workers stand outside a construction site after a day's work in Beijing's central business district, June 25, 2015. China will make more targeted changes to its policies to support the Chinese economy, Premier Li Keqiang said on Friday, noting that the country needs to invest "great effort" to foster economic growth. Picture taken on June 25, 2015. [Photo/Agencies]

The pace and scope of innovation in China has begun to increase. How has this happened, and why is it happening now?

The answer lies in the unprecedented challenges that China faces, including corruption, pollution, unsustainable local debts, ghost towns, shadow banking, inefficient State-owned enterprises and excessive government control over the economy. Certainly, no one would argue that these are positive developments for China; nonetheless, they have arguably been a blessing in disguise. They have imbued reform efforts with a degree of urgency that has had a far-reaching impact; indeed, conventional GDP data do not reflect the scale of the transformation that they are driving.

Of course, China has long been committed to market-driven structural reforms, from the national to the municipal levels. It could not have become the world's second-largest economy otherwise. But the key to China's success has been constant experimentation, and the pursuit of that credo appears to have intensified.

For example, the networking of telecommunications, roads, railways, air traffic, and maritime transport enabled China to become a global hub for the production of consumer durables, and improve their distribution. More recently, China began applying the same approach to building a more innovative, knowledge-based economy - one in which the services sectors, together with domestic consumption, drive growth.

As a result, the country has increasingly been focusing on the so-called "killer apps" that, according to historian Niall Ferguson, drove the West's rise to economic dominance: competition, science, property, modern medicine, consumerism and an ethic of hard work. In particular, China has worked to boost market competition and foster science and innovation, with progress in these areas underpinned by efforts to improve governance, strengthen mechanisms of accountability and boost investment in public goods.

Crucially, even as China's specific goals have shifted, its policymakers have adhered to the experimental approach that has served the country so well thus far. Indeed, it was the combination of broad-based education, openness to science and innovation, investment in advanced telecommunications infrastructure, and know-how in making smartphones that fueled China's rapid advance in the e-tail and Internet industries. This openness to innovation - along with what some say is lax regulation - also allowed platforms like Alibaba to integrate payments and logistics before many Western players did.

China's "learning-by-doing" approach is likely to continue to yield innovative solutions to emerging problems. For example, faced with a shrinking labor force, the government has ramped up investment in robotic automation and other productivity-enhancing technologies. The impact on China's competitiveness of rising real wages - which have been increasing by more than 15 percent a year since 2008 - will, the country's leaders expect, ultimately be offset by the benefits of productivity-led growth, not to mention the much-needed increase in domestic consumption.

Of course, China's approach has brought significant stress, setbacks and failures. China's real estate, credit, and stock market bubbles - which produced ghost towns, bad local debts and stock-price volatility - attest to that. But the policy decisions that gave rise to these problems - decentralizing control over land and permitting the market to direct the flow of talents, trade, investment and capital - have also been critical to progress.

China's leaders understand this well. Rather than avoiding risk, they remain prepared to reverse failing policies; and, if necessary, they are willing to pay for mistakes. Given the savings the country has built up, reflected in bulging foreign exchange reserves, the central government has the fiscal room to afford it.

The Chinese government is running real risks as it pushes through structural reforms that are unprecedented in speed, scale and complexity. Fortunately, China has both the experience and the wherewithal to experiment with the next stage of structural transformation.

Andrew Sheng is distinguished fellow of the Fung Global Institute and a member of the UNEP Advisory Council on Sustainable Finance, and Xiao Geng is director of research at the Fung Global Institute.

Project Syndicate