China's Economy, Back on Track
Next month, President Xi Jinping and Premier Li Keqiang will use an important meeting — the so-called Third Plenum of the Communist Party's 18th National Congress — to unveil China's priorities for reforming economic policy for the next decade.
Yet because it will probably decide only general policies, leaving the specifics for later, some cynics have already begun to dismiss the reforms as too little, too timid and too late. They note that a decade ago, a previous generation of leaders failed to reduce the influence of state-owned enterprises and to complete the economic reforms of the 1990s.
But I believe the prospects for restructuring China's economy — bolstering the role of the market, expanding opportunities for small and medium-size businesses, allocating capital more efficiently and improving the balance between consumption and investment — are better than at any point since the 1990s. At a time when global growth remains sluggish, reinvigorating such reforms is more important than ever to the world economy.
There are four reasons for my optimism.
First, China's leaders clearly understand that their growth model needs to change.
In speech after speech, Xi and Li have put their political capital on the line by promoting economic reform. They have drawn up blueprints and adopted pilot programs — like a free-trade zone in Shanghai — that will bolster the market and rationalize the allocation of capital, for instance by permitting more foreign competition and greater fluctuation of interest rates.
Other reforms, including liberalizing deposit rates, still need to be put in place, but an experiment to liberalize lending rates is a very positive step. So is Beijing's signal that it might open more sectors of its economy to competition through a bilateral investment treaty with the United States.
Second, China's new leaders are strong enough to press for change. The history of Chinese economic reform suggests that vigorous central leadership is essential. Deng Xiaoping was the determined architect behind China's initial reforms in 1978 and their reinvigoration in 1992. Zhu Rongji, the premier under President Jiang Zemin, pushed through reforms of the taxation system and state-controlled industries that paved the way for China's joining the World Trade Organization in 2001.
But in the decade or so since then, reforms stalled, and a major cause was the evaporation of political commitment in Beijing. The new leaders have signaled that they are prepared to move. An anti-corruption campaign begun by Xi demonstrates a willingness to take on even the most politically sensitive pillars of the state-led economy.
Third, China no longer has the luxury to delay needed reforms. China's economic output expanded nearly sixfold between 2002 and 2012, from US $1.5 trillion to US $8.3 trillion, but that growth fostered complacency. True, it weathered the financial crisis through giant spending on public works, but that only put off the day of reckoning. The presumption that China can simply grow its way out of any problems no longer holds. Growth is slowing, inequality has widened, provincial and local government debts have climbed. China's export-oriented sectors face harsh headwinds, from sluggish consumer demand in advanced markets to rising labor costs at home.
Fourth, public expectations for change are higher than ever. When the new leaders were appointed last year, they were compared favorably to their immediate predecessors, President Hu Jintao and Premier Wen Jiabao. But the honeymoon for Xi and Li, who took over last November, is over.
Increasingly, they are being measured against the bold Jiang, the Communist Party leader from 1989 to 2002, and Zhu, the premier from 1998 to 2003. And so the necessity for action is greater.
Momentum is building for reforms that would introduce market prices for oil, gas and other natural resources so that prices better reflect supply and demand, rather than official fiat. Distorted pricing has been one cause of China's energy inefficiency and environmental degradation. Like the new steps toward liberalizing energy prices, Shanghai's new free-trade zone is another positive indicator. More is needed — broader access to capital, greater investment options and protections from the risk of haphazard capital flows — if Shanghai is to become a global financial center.
A new round of fiscal reforms is also likely, leading to more rational allocation of resources between the central and local governments, which are struggling to rebuild weakened rural pension and health care systems and manage the largest urbanization in human history in a sustainable way, while paying for unfunded mandates from Beijing and maintaining job growth.
This vast array of specific reforms can't be achieved at a stroke, and certainly not at a single party gathering. But the decisions likely to be taken in November will set China's economy in a positive — and lasting — new direction. Advanced economies, like the United States and the European Union, depend on it as much as China does.
The author was the secretary of the Treasury from 2006 to 2009 and a former chairman and chief executive of Goldman Sachs and is chairman of the Paulson Institute. The article was first published on the New York Times on October 4.
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