Joseph Christian

Slow and steady crawl toward economic reform

By Joseph Christian (China Daily)
Updated: 2010-10-22 15:53

At the tail end of China's National Day break, Vice-Premier Li Keqiang was busy shaking hands and giving speeches during an inspection tour in Henan province.

With choreographed photo ops with what must be the cleanest construction workers in China and speeches filled with phrases such as "modern industrial structure" that would better be left in an economics classroom, it would be easy for foreign observers and reporters to write the trip off. But that would have been unfortunate because the trip offered a glimpse into the future of China more than you think.

For years China has looked to its gargantuan foreign trade surplus to fuel its astonishing GDP growth. In many ways China became the world's factory; and it was glad to do so because it was the most reasonable way to achieve its GDP goals. At the outset of the nation's economic reforms, if China focused on its domestic markets there would have been no way they could have grown to what they are today. China's domestic markets were too undeveloped and its citizens did not have enough disposable income to drive growth. China's government wisely chose foreign investment and export as a driver for growth.

But now the world has changed. China is an economic powerhouse whose position in the world has only been fortified by recent global economic woes. China is no longer viewed just as an investment opportunity; it is increasingly becoming an equal both in terms of cooperation and opposition. Its increasing role in the G20 and environmental initiatives as well as the increased pressure from Europe and the United States for China to revalue its currency is proof enough.

But one constant remains. China is still driven by the maxim of "development first". Upon reflection this makes sense because while China has vaulted onto the world stage it is still not a "developed nation".

The history of economic development makes it clear China will not have such a large trade surplus forever. Things like wage increase, currency valuation and lagging global demand will, over time, work to reduce China's amazing trade surpluses. Therein lies its dilemma: How to maintain the inertia and strength of its foreign-fueled growth in the world's changing economic environment.

China is answering this dilemma by looking to further develop, urbanize and increase consumption from its heartland. China is in the process of shifting that growth to awakening consumers in its second-, third- and even fourth-tier cities. While export-oriented cities on the eastern coast continue to be an important part of China's growth, they will slowly be overshadowed by growth from China's interior.

Make no mistake, when Chinese officials such as Vice-Premier Li go on inspection tours of inland provinces such as Henan, it's much more than just following Party line or looking for a nice photo op; it is a clear signal of intentions. China knows that it must shift its economic growth gears domestically in order to have a more balanced and developed economy. It knows that it has to urbanize the network of cities that are sprawled across its heartland to ease pressures on mega-cities in the East and to spur domestic consumption as a driver of growth. In short China has come to terms with the fact that its development model must change so it can continue in a sustainable way.

Lately while the developed world has made a point of making China's currency valuation the topic of focus, it must be understood this is not the main focus for China. China will continue to follow its carefully planned maxim of "development first" and that now means development of its interior. China is going through a very important phase of balancing its export-heavy GDP growth with domestic consumption and production. Results are going to be far from immediate and until such a balance is achieved there are certain topics, like currency valuation, that Chinese leaders will continue to largely ignore when it comes to foreign pressure.

In the end if a natural balance in growth can be achieved between domestic consumption and international exports, the problems might well solve themselves. But be certain China is not going to rush into anything.

The author teaches at Beijing Foreign Studies University.