Long after concerns about tightening U.S. monetary policy have faded, a more profound issue will still dog global policymakers: how to handle the second stage of China’s economic revolution.
The first phase, industrialization, shook the world. Commodity-producing countries boomed as they fed China’s endless appetite for natural resources. Six of the 10 fastest-growing economies last decade were in Africa.
China’s flood of keenly priced manufactured goods hollowed out jobs in advanced and emerging nations alike but also helped cap inflation and made an array of consumer goods affordable for tens of millions of people for the first time.
The second stage of China’s development promises to be no less momentous.
Consumption will take over the growth baton from investment. Services will grow as a share of the economy, while industry shrinks. Commodity-intensive mass manufacturing based on cheap labor will give way to greener, cleaner ways of making things.
More of the value added by a better-educated, more productive workforce harnessing new technologies will stay in China instead of going to multinational companies.
China will remain the most powerful engine of global growth for the next couple of decades, but it will no longer be just processing imported raw materials and components for re-export, said Li Jian with the Chinese Academy of International Trade and Economic Cooperation, the Commerce Ministry’s think tank.
To show it is serious about more sustainable growth, China deliberately engineered the first-half slowdown that unnerved markets in order to address these longer-term structural priorities, according to President Xi Jinping.
Xi and the other new leaders of China’s Communist Party are expected to approve a blueprint for reform at a plenum in November. Overcoming vested interests opposed to the new economic model will be a stern test of their credibility.
A lot is at stake for the global economy too.