reverse in policy for the "reserve ratio" represents a larger effort
within China to simultaneously pursue two competing -- and sometimes
contradictory -- economic goals: maintain growth and avoid inflation.
Economists outside of China, and political leaders inside of it, have
debated for years how China can keep growing while controlling growth's
most destabilizing byproduct: inflation. The consensus, especially within Beijing, seems to be for more market reforms (current Premier Wen Jiabao and predecessor Zhu Rongji have both said as much). But Chinese leaders will also have to deal with the industries and politicians whose vested interests currently run counter to those reforms.
It's a tight-rope walk that economists call the "transition trap."
It's a transition from an economy based on exports (which relies on
Chinese goods, and thus the Chinese currency, staying cheap), to an
economy based on domestic consumption and investment. It's a transition
from state capitalism, which can marshal amazing industrial output at
the flick of a central planner's pen, to something a little more
market-based, where private businesses and private consumers drive
growth. It's about selling iPhones to Chinese consumers rather than to
Americans, or better yet about founding the Chinese Apple.
would be a monumental challenge for any country, and the nature of
Chinese governance can make it both easier and tougher. Easier because
Chinese leaders have been openly discussing and working on how to see
the transition through, and the Chinese government has already walked a
few economic tightropes, most famously by opening up their economy in
the early 1990s. Tougher because, to make this transition work, many of
the same groups of people who have profited so nicely off of the 20-year
liberalization may have to start giving up some of their new-found
power, by allowing rule-of-law to check corruption and allowing the
market to edge out state planners, and some of their wealth.
stakeholders will resist any attempt to transfer wealth to new
constituencies," warned a pessimistic Eurasia Group report on China's
latest Five-Year Plan, which set goals to accelerate the country's
transition. Those stakeholders are the big industries, the local and
regional officials who sponsor them, and their friends in Beijing; people like Bo Xilai,
the Chongqing party chief who was recently ousted after using his power
to make himself supremely wealthy. The Eurasia Group report goes on,
"China's leaders are unlikely to deal with these powerful 'losing'
interest groups holistically. Nor is a strongman or tightly knit group
of leaders likely to be able to overcome them." Unless, that is, Chinese
leaders can make "significant changes to governance structures" --
namely, by boosting rule-of-law and fighting corruption, both of which
would mean surrendering a bit of their own power.