The world is having a hard time accepting a slowing Chinese economy. Hooked on 30 years of 10 percent average gains in Chinese gross domestic product (GDP), growth-starved economies around the world are desperate for more of the same. But it isn't going to happen.
Some six years ago, China's then premier, Wen Jiabao, posed a paradox that came to be called the "Four Uns": though China's economy looked strong on the surface, Wen argued it was increasingly "unstable, unbalanced, uncoordinated, and ultimately unsustainable." The debate those remarks sparked is now over, and a new Chinese growth model is at hand. China's 12th Five-Year Plan, enacted in 2011, calls for a shift to an economy driven increasingly by domestic consumption, rather than one driven largely by exports and investments.
China's new generation of leaders, President Xi Jinping and Premier Li Keqiang, are now focusing on implementing this daunting structural transformation. During the U.S.-China Strategic and Economic Dialogue on July 10-11, an annual meeting between high-ranking officials from the two countries, the opportunities and the risks of this rebalancing will feature prominently in the discussions.
For its part, China's new leadership is committed to rebalancing. With GDP growth slowing to 7.7 percent in the first quarter of 2013, and data for April and May pointing to more of the same, previous Chinese leaders would have quickly announced a new infrastructure program or other stimulus policies to spur the economy. By not introducing new spending initiatives, the government of Xi and Li has sent a strong signal that Beijing is now willing to accept slower growth.
That conclusion was reinforced by last month's liquidity squeeze in the overnight bank funding markets. Because the People's Bank of China, the country's central bank, didn't intervene as it normally does in such circumstances, the interbank lending rate shot up on June 20, reaching a record of 13.4 percent -- more than four times the average over the last 18 months (it dropped back a few days later.) This lack of intervention sent a strong signal to banks, especially China's "shadow banks," that the days of risky and undisciplined lending must end.
The message from China's fiscal and monetary authorities is clear: the days of open-ended hyper growth are over. At the same time, Xi has been calling for a "mass line" education campaign aimed at addressing problems arising from the "four winds" of formalism, bureaucracy, hedonism, and extravagance. Though cryptic, his message appears to underscore a new sense of political discipline, to complement the discipline of China's fiscal and monetary policies. The Chinese Communist Party, Xi seems to be saying, must realign itself with the core interests of the people and their requisite economic fundamentals.
China is at an important juncture in its development journey. It's determined to move away from the quantity dimension of growth to a new focus on the quality of economic development. This is not only about a downshift in GDP growth: it is also a critical shift toward the long dormant Chinese consumer, opening up one of the largest consumer markets in the world to anemically growing Western countries.
This is especially important for the United States, which continues to languish in a weak recovery with unacceptably high unemployment. Washington needs to push hard for free and open access to these markets, an issue that will undoubtedly be high on the agenda for the Strategic and Economic Dialogue.
While China's previous administration recognized the importance of structural change, they made disappointingly little progress. Slower growth doesn't work for China unless its economy undergoes a fundamental transformation. The new policy discipline of Xi and Li is important because it effectively ups the ante on China's rebalancing agenda -- making implementation of the 12th Five-Year Plan all the more urgent.