The Next China is now at hand. Yet the United States remains fixated on the Old China, unprepared for major transformation in the world's second largest economy. The US-China Strategic and Economic Dialogue slated July 10 to 11 in Washington, DC, provides a major opportunity for both nations to recast what could well be the most vital economic relationship of the 21st century.
China is most assuredly on the move. The debate over a strategic shift to a more balanced consumer-led growth model is over. The focus is on implementation. The 12th Five-Year Plan laid out the strategy - three pro-consumption building blocks of services-led job growth, urbanization-driven income leverage and a more robust social-safety net. But it was tough to get the ball rolling, especially in light of the inertia of China's deeply entrenched power blocs at the local government and state-owned enterprise levels.
China's new leadership under President Xi Jinping and Premier Li Keiqang has broken the gridlock. With a series of stunning moves in the early months of their administration, China's fiscal and monetary authorities have been given new marching orders. The growth slowdown of early 2013 has not been countered by a typical Chinese proactive fiscal stimulus. Instead, the new leadership seems content with 7.5 to 8 percent growth in gross domestic product. Similarly, the central bank did not rush in to stem a liquidity crunch in June. Instead, it used the occasion to caution banks, especially "shadow banks," against returning to an undisciplined and excessive expansion of credit.
The message from this new approach to Chinese macroeconomic stabilization policy is clear: Gone are the days of open-ended hyper growth. Significantly, this message has been reinforced by an important political overlay. Xi's rather cryptic emphasis on a "mass line" education campaign aimed at addressing problems arising from the "four winds" of formalism, bureaucracy, hedonism and extravagance underscores a new sense of political discipline directed at the Chinese Communist Party. The CCP is being urged to realign itself with the core interests of citizens and their need for fair and stable economic underpinnings.
This new mindset works only if China changes its growth model. A services-led growth dynamic, one of the pillars for a consumer-led Chinese economy, is consistent with a marked downshift in trend GDP growth. That's because services generate about 30 percent more jobs per unit of Chinese output than do manufacturing and construction - allowing China to hit its all-important labor absorption and social stability goals with economic growth in the 7 to 8 percent range rather than 10 percent as before. Similarly, a more disciplined and market-based allocation of credit tempers the excesses of uneconomic investments, necessary if China is to begin absorbing its surplus saving to spur consumer demand.
With China's new leadership embracing a very different approach to policy and politics, it has little choice other than to move ahead aggressively in implementing its consumer-led rebalancing. The United States needs to take that possibility as a given as it frames its approach to the upcoming dialogue with China. This raises four key issues:
- First, China's consumer-led growth presents the United States with an important opportunity. With the American consumer on ice for more than five years - underscored by average annualized growth of just 0.9 percent in inflation-adjusted consumption expenditures since the first quarter of 2008 - the US is in desperate need of a new source of economic growth. China is America's third largest and most rapidly growing export market. Washington negotiators should push hard on market access, ensuring that US companies and their workers have the opportunity to capitalize on China's transformation.
