Understanding China's Economic Challenge and Why It Matters

Chinese leaders must slow their country's growth and transform how their economy functions.

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Chinese officials attend the inauguration ceremony of a new thousand-foot skyscraper tower in Huaxi / Reuters

How many countries with nearly two decades of double-digit growth under their belt would look in the mirror and say, "hey, it's just not working anymore?"

I daresay, not many.

But that is precisely what some Chinese leaders appear to be doing.

Last summer, I wrote a lot for this blog about a report from Eurasia Group called China's Great Rebalancing Act. I wrote the report with my colleagues Nicholas Consonery, Damien Ma, Michal Meidan, and Henry Hoyle, and our punchline was simple: China's growth model is no longer sustainable and the country's savvy leaders know it. And, we argued, they are committed in principle to rebalancing China's economy because their capital-intensive, export-oriented approach is delivering diminishing returns and threatens to become a major political vulnerability for the government.

But, we continued, making these changes will be incredibly difficult. To do so, China's leaders will have to make serious and deep reforms to many elements of their country's political economy. They will have to overcome inertia and "reform fatigue," fight through the opposition of powerful constituencies among state-owned enterprises and entrenched financial interests, introduce a more market-based approach to energy policy, roll back subsidies (for example on land and energy), reform financial markets to free up capital for entrepreneurs and private business, boost domestic consumption, and so on. In short, they will have to alter the underlying structure of China's political economy.

The operative word here is "political" economy. Do such reforms sound daunting? They should--and mostly for political reasons.

Nick, Damien, Michal, Henry, and I were skeptical of China's ability to undertake such deep reforms. Put bluntly, we argued that Beijing ultimately would "lack the political stomach and sense of the moment to implement a comprehensive and ambitious rebalancing agenda."

So the release of an important new World Bank report, China 2030, makes this an especially good time to reexamine these propositions.

Let's go back to my point about Chinese leaders looking at their country in the mirror. China 2030, echoes some of the themes we touched on in China's Great Rebalancing Act. But it does so at greater depth and in a more prescriptive, not simply analytical, way. And, very interestingly, it does so with the apparent buy-in of China's leaders. The Wall Street Journal reported last week that some of China's incoming crop of top leaders has been loosely or indirectly associated with the report.

The China 2030 project emerged from a proposal to China's leaders from the World Bank's president, Robert Zoellick, who suggested a joint study on China's medium-term development challenges. As the report's preface lays out, "the research was organized jointly by China's Ministry of Finance, the Development Research Center of the State Council (DRC), and the World Bank. The report was written and produced by a joint team from DRC and the World Bank who worked together as equal partners."

So, some political and economic elites in China have taken ownership of this study.

The DRC's president, Li Wei--whose prior career includes stints at such pillars of the entrenched establishment as the State-Owned Assets Supervision and Administration Commission (SASAC), which oversees China's 120-odd central state-owned enterprises--co-signed the foreword with Zoellick. But the Journal reports that his deputy, Liu He, may be the key figure, not least because he helped to author China's 12th Five Year Plan, which runs from 2011-15, and which many (including our report) argue offers a blueprint--at least on paper--for many aspects of the rebalancing agenda.

Presented by

Evan A. Feigenbaum is Adjunct Senior Fellow for East, Central, and South Asia at the Council on Foreign Relations and blogs for "Asia Unbound."

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