Among all the wildly photogenic moments in Beijing, the red miniskirts were a standout from the missiles, the tanks and the giant fish.
The legions of female militia clad in minis, white jackboots and submachine guns last week seemed especially incongruous under Mao Zedong’s gaze. His portrait, which hangs over Tiananmen Square, can make one feel like it’s 1 October 1949. It was then and there that he declared victory in a civil war.
China’s 60th anniversary spectacle left little doubt that Mao jackets are out, Gucci is in. Well, perhaps not the firearm accessories. Yet if the 2008 Beijing Olympics didn’t do the trick, China’s immense and flawless bash left no doubt about its ever-growing claim to global influence.
Just don’t let the show distract you from the daunting list of things China must pull off in order to thrive. It includes finding a new growth model, raising hundreds of millions more out of poverty, getting the state out of the economy, attacking corruption, saving the environment and figuring out what to do with more than $2 trillion (Rs95 trillion) of currency reserves.
Before we get into why China’s next 10 years will be far more challenging than the last 10, let’s accentuate the positive. Of all the factoids that impress economists, China’s success in raising 300 million citizens out of abject poverty leaps out. For all the potential that investors see in India, China is doing a far better job of improving living standards.
The Chinese government knows the importance of infrastructure. China’s high-speed rail networks put the US to shame. So does the nation’s success in building first-world roads, airports and power grids. The pace at which China is overtaking Japan is as impressive as it is unnerving to officials in Tokyo. It may surpass Japan as early as next year to become the second biggest economy.
Goldman Sachs Group Inc. predicts China may surpass the US by 2027. Imagine the rumblings that will cause in Washington, where many see a resulting loss of global power. We got a preview of that last week with protests in New York over the Empire State Building’s shining red and yellow to commemorate China’s anniversary.
China understands performance legitimacy. Its deal with the people is this: We provide growth and raise living standards, and you avoid making trouble for the Communist party. China is growing about 8% this year, while the US shrinks.
Now for a reality check. Once the celebrating and back-slapping ends, China needs to rebalance an economy that’s addicted to exports and lacking holistic growth sources. Without help from the $14.2 trillion US economy, good luck maintaining rapid growth a year from now.
Government stimulus is helping at the moment. China’s outlook is still contingent upon a global rebound. Cushioning the pain with top-down policies is only so good for so long. China must embrace a new growth model that’s more about domestic growth than shipping cheap goods overseas.
The last 10 years were easy, in a sense. Making them possible was China joining the World Trade Organization, which propelled growth into the double digits. The next step is making the export engine but one among many keeping the economy aloft.
China must do what other industrializing nations haven’t: avoid a domestic crisis. No fast-rising power has grown in a straight line. China’s bust could come in many forms—a bad debt crisis, inflation from too much investment, deflation from weak demand or social instability if growth isn’t shared evenly.
These risks leave China reluctant to make its currency convertible. The yuan’s status is a sign of Chinese weakness. Strength isn’t having the biggest stockpile of reserves. It’s being able to borrow easily in your own currency and having a dynamic bond market to facilitate the process. The US can, China can’t. That’s why China is shackled with so many dollars.
Another task is to close the widening gap between rich and poor. While socialist in name, China has bigger income differences than Taiwan and South Korea have now or during their export-led industrialization periods. Reducing corruption, both at the local and national levels, is part of it. Increasing the quality and efficiency of growth spreads its benefits rapidly.
A lack of free speech also holds China back. It spends an inordinate amount of time and energy limiting what is said about it and by whom. It’s entirely unclear how you can thrive in the information age while censoring what entrepreneurs and visionaries know about China and the world around it. For all China’s growth and surging stocks, it’s easy to forget how poor its 1.4 billion people are. The International Monetary Fund ranks China 100th among economies in per-capita gross domestic product—behind Kiribati and Angola.
This isn’t to detract from China’s impressive achievements. China has beaten the economic odds this year, and then some. It’s just that too much remains to be done to prepare for tomorrow to get carried away by a parade of good news today.
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