Crisis in Europe, Transformation in China

[xchrom]

http://www.theatlantic.com/international/archive/2011/11/crisis-in-europe-transformation-in-china/248662/

"I want to remind those cadres who are staying on the job beyond me: my biggest worry right now is an overheating economy," Chinese Premier Zhu Rongji said in a January 2003 cabinet meeting, his last before leaving office. "I've already worried about this for a year now. I wouldn't say this publicly, but only bring it up to the top leadership, that overheating is the one thing that preoccupies my mind. Many signs seem to have emerged, and if we're not vigilant, the economic situation will be difficult to rein in." Zhu's comments, recently published for the first time, are translated to English here.

The next premier, Wen Jiabao, warned in 2007 that China's economic model of skyrocketing export-based growth was "unstable, unbalanced, uncoordinated and ultimately unsustainable." Fortunately, he and his government seem to know how to fix it. But the question isn't whether China's economy can accommodate the necessary changes. It almost certainly can. The big question is whether China's political system can accommodate those changes. If it can't, Chinese citizens may begin to more aggressively question the Communist Party's model of rule, which delivers tremendous economic growth at the cost of political and human rights.

When they issued their calls for change, neither Zhu nor Wen could have possibly foreseen the financial crises that have crippled the U.S. and European economies. Though China's leaders have long planned to change the country's economic model -- which is also at the heart of its political model -- these crises mean that China must accelerate its plan to restructure its economy. Right now, China's economy is based on exporting to wealthy, developed countries. For that export-driven system to work, China's economy needs to remain weaker than those of its buyers. One of the biggest reasons that China sells so much stuff is because it can produce that stuff cheaply. But as China's growth accelerates and European and American growth slows due to financial crises, China is catching up with the developed economies faster than anyone had anticipated. If and when China gets too wealthy to continue exporting cheap products -- or if the developed economies become too weak to keep buying them -- it will be in big trouble.

China will have to shift its economic emphasis from exports -- driven by state-run industrial enterprises -- to individual households. This means moving wealth from the state and state-run companies to Chinese households, which would then drive China's continued growth. This is feasible -- China has nearly 1.5 billion consumers, after all, an increasing number of whom are entering the middle class, where they will be willing and able to power the economy. This wouldn't be so different from how the U.S. economy became the largest in the world: our consumer base is big, rich, and it loves to shop.