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.
"It's true that Chinese authorities are
hotly discussing how and whether they can move away from the
export-dependent model of development," colleague James Fallows wrote in
an email when I asked him about how China was handling the worsening
European crises. "But this has been the main topic of discussion for at
least three years, and the real question is whether they can do so, and
how, and over what period of time. For outsiders the real question is
whether there is anything the rest of the world can do to hasten the
The timeline for how quickly China needs to restructure
its economy appears to be shortening, and not just because of the
ever-expanding European debt crises. Housing authorities just capped real estate prices in a second city to try and prevent a housing bubble, informal lending markets are booming, export growth is already slowing ahead of expectations, and the gap between mainland China's managed currency rate and Hong Kong's floating currency rate is expanding.
China doesn't appear to be anywhere near financial calamity or anything
like it, but the urgency for China to change its economic model is
The changes that China's leadership knows it needs
aren't just about making Chinese households better off and finding a way
to responsibly manage overall growth. They're about maintaining the
very stability of the Chinese system. In a democracy, if people feel
their government has failed them then they can vote that government out
of office. But in an autocracy like China's, popular discontent can be
more dangerous. Demonstrations, some of them violent, have already
broken out in a number of interior cities this year. Last month, a young
man lit himself on fire in Tienanmen Square, an eery echo of the self-immolation that set off Tunisia's revolution in December.