Nepali Times
An economic facelift


For three decades, the dividends from Deng Xiaoping's initial decision to open China's economy to market forces, and to the world, have fuelled rapid growth. Until recently, the key was China's vast supply of low-cost labour, which provided the foundation for the country's export-oriented model.

Concentrated in coastal China, this model produced an uneven distribution of output and established a unique pattern of high savings and low consumption. Indeed, China's savings rate rose steadily following the onset of market reforms, from 38 per cent of GDP in 1978 to 51 per cent in 2007.

Economic growth is determined not only by factors of production such as labour, capital, and technology, but also by institutional arrangements. Through 30 years of reform, China has successfully completed the institutional transition from a highly centralised planned economy to a dynamic market-based system. Beginning from rural tiered management based on the household contract system, Chinese reformers supplemented public ownership with various other forms, with the market increasingly playing its fundamental role in allocating resources under the macro control of the state.

Reform coincided with increasing globalisation, unleashing forces that restructured not only the Chinese industry, but also production processes around the world as China challenged established manufacturers and became part of global supply chains. Developed economies' massive outsourcing of traditional manufacturing, high-tech manufacturing, and even some low-end services has brought exciting opportunities for emerging markets that, like China, have resource and cost advantages, strong market potential, and industrial support capabilities.

Today, however, the catalytic power of Deng's initial changes has waned, with rising wages, weakening external demand, and increasing competition from other emerging economies indicating the exhaustion of a growth model premised on exports and investment. In particular, the 2008 global financial crisis and the subsequent eurozone debt crisis have forced Chinese officials to forge a new path for future growth.

Most important, export-led growth must give way to domestic economic drivers. This implies the need to upgrade China's industrial structure, accelerate the formation of human capital, facilitate technological progress, and undertake further institutional reforms.

If successfully implemented, this agenda is likely to reverse global savings and consumption patterns that have underpinned large imbalances in recent years. China is responsible for the savings side, while the US disproportionately accounts for the consumption side, ultimately turning the Chinese into America's creditors.

Of course, global savings and consumption patterns have undergone significant change since the financial crisis, with both the West and China trying to restore internal equilibrium. Doubling average household income by 2020 Ė the target set at the Chinese Communist Party's 18th Congress in November Ė is likely to release 64 trillion renminbi ($10.3 trillion) in purchasing power, with China's huge internal market gradually becoming a new long-term driver of domestic and international growth.

This model presupposes that China will develop domestic capital, rather than simply relying on foreign investment. To be sure, the ability to attract and absorb external financing has been an important reason for China's accelerated industrialisation, marketisation, and integration into the global economy. Thirty years ago, this was the most efficient and practical strategic choice for China, owing to its lack of capital and advanced technology.

But a country's economic development ultimately depends on its ability to accumulate capital and allocate it efficiently. With 90 trillion renminbi in banking assets and $3.2 trillion in foreign-exchange reserves, China is now playing a significant role in global finance. And yet the high volume and inferior quality of these assets have also posed challenges to the country's ability to complete the transition from trade power to financial power, and thus to exploit the competitive advantages of Chinese capital.

After three decades of growth on a scale unprecedented in human history, China's new leaders are facing a historical turning point. Whether China successfully changes its economic model will ultimately determine its prospects not only for further growth, but also for continued stability.

Zhang Monan is a fellow of the China Information Centre, fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.

1. kiran thapa
China has certainly solved an economic problem, which is considered a smaller problem compared to bigger one, a political problem. As China's next generation is getting out of college, they'll start questioning themselves. "Are Chinese people good enough only to eat, sleep and make money". How about political freedom. When this question becomes bigger than eveyday economic freedom, then China's clock will stop for another 50 years. That is why it is very important to have both political and economical development at the same time. I can bet my life that when chinese political instability kicks in, power vaccum will disintrigate the country into many pieces. My message to fellow like Zhang Monan is not to brag about economic development only. Solve a bigger problem first. Learn from history. Chinese people aren't different from Libyan or Nepali or Egyptian. We are all human and human being can think.

2. Anonymous
The Chinese people under the leadership of Mr. Deng learned profound lessons from the failure of the Soviets. Precisely because the Soviets could not manage their economic transition vis-a'-vis the global capitalism, the entire Soviet state disintegrated and collapsed under the rubble of history. Mr. Gorbachev's much hyped political freedom, namely, 'glasnost' and 'perestroika' could never take off in the USSR. On the other hand, the Chinese leadership was much adept to strategically navigate the rudder of their economic ship in the rough ocean. As a result, China not only survived as a nation with its political and territorial integrity intact, moreover, it emerged as a robust nation to deserve the next 'superpower status' in the world arena. Economic stability provides firm foundations to achieve political stability, and eventually social harmony. Since democracy and freedom are quintessentially pluralistic, nations have all the rights to arrive to them independently, and through different routes and alternative paths. Adaptability rather than rigidity is the path to survival and prosperity and progress in the long run.

3. kiran thapa
"Economic stability provides firm foundations to achieve political stability, and eventually social harmony"- China is used by the West as a source of cheap labor in a stable police state where investment is secured. Multinational will move out as soon as rebellion triggers in China. Social harmony in China will be short lived during economic growth. Where is social and political dialogue which is a foundation of the country. Do you think Chinese people will take order from the Center for ever. In political front Nepal is ahead of China. Atleast we Nepalese are talking about the foundation of our country. No matter how much instability the country is going through, Nepal is talking about constitution which represents the entire contry. China on the other hand is like Panchayat one party system. You have to please the "Center" instead of people. The author of this article must be pleasing someone in the "Center" to get government job back home. I don't see anything new in the article that enlightened me.  

4. Tashi Lama
For Mr. Anonymous: Your comments are just made on the new found prosperity in China, I mean a Capitalist Communist China, which in reality is all rooted on the grounds of corruption and misuse of powers. World knows that 90% percent of rich people were all Politburo members and their near ones who amassed lots of wealth during a very short period. Just a clear example is out going PM Mr. Wen-Jiabo who owns a property worth 2.7 billion U$ Dollars, and there are many who amassed such property and who are unaccounted for, their new chief Mr, Xi-Jinping has a property worth 332 million US Dollars, he will add up sooner within his 10 years rule. If we dig up all the truth and atrocities made by this autocrat regime of China, everything will go upside down in China within a year, and this will happen soon. The new found prosperity in China is like castle build on thick lies of ice, when the rays of truth will fall upon it stronger and warmer, it will melt away sooner and will be drowned in the ocean of their guilt and wrong doings, forget of becoming any kind of super power, yes they are already a super fraud regime in this world. To become a super power, real democracy and power of morality is must, without which none becomes super power other than super fraud or super corrupt regime. At present 1.3 billion live a life in the darkness, except of those who are just happy with their wealth earned  by corrupt means. This we can clearly make it out on their strong restriction on media and internet access in whole of China including all the occupied territories Tibet, Mongol and Xinjiang etc. Everything is strictly controlled by the state and it's state owned media houses, which means they are hiding all their guilt in darkness. The present regime in China is like an old Oak tree looking huge and green, knowing not that everything is rotten inside, nearing to fall down and turn into ashes. What we see all beautiful in China is nothing stable, it is just like a facial make up of prostitute which can't face the rain of truth. Mr. anonymous is nothing anonymous than the hired puppet of Commies, who purposely makes these comments to save the face of bloody repressive regime in China! It makes me laugh louder and louder! ha!...ha!...ha!......  

5. Anonymous
Come on guys: "Kunda, kunda pani; munda, munda vichar!!" No need to play "puppets" of either Commies or Westies!

6. Aga Nyima
China is a nation with 1.3 billion Chinese, just an economic face lift is nothing if the rest are suffering with the iron fist rule of repression. As a human being there is something much more to be cherished and longed for, that is morality and human dignity, if these two things degrades, new found prosperity is nothing more than a man with cash looking for a moral values in the market of greed and corrupt! This exactly is what this present regime of CCP of China is!

(11 JAN 2013 - 17 JAN 2013)