The ‘developing interior’ case that China will keep growing

October 31, 2012

Workers inspect motherboards on a factory line in Shenzhen. (VOISHMEL/AFP/Getty Images)

China's economic growth is slowing, endangering both the global economic recovery and China's own future. There are few stories out there with a bigger potential impact, so China-watchers are understandably ardent in arguing either for or against China's ability to  maintain economic growth and political stability. These analysts call themselves China bears and China bulls, respectively. Their disagreement boils down to whether or not the unique Chinese model "works," and they argue a lot.

Now, with global concern rising over China's economic and political troubles, Slate's Matthew Yglesias says that the China bears are winning the conventional wisdom. So,  he's reiterated one of the strongest "bull" cases for China's continued success: now that the major coastal regions have urbanized and developed, flagging interior provinces can catch up, carrying the national growth.

My bull case for China would be that for all the rapid catch-up growth the PRC has seen there are still enormous region-to-region gaps. That means that even if Shanghai and the Pearl River Delta [which includes Shenzhen, famous for its iPad-producing plants] have run out of room for further catchup, there's still enormous scope for interior regions to catch up with the prosperous coasts. We know that existence governance institutions were good enough for coastal China to do a lot of catch up so why shouldn't they be good enough for the interior to catch up with the coasts?

China already seems to be pursing this, building lots of expensive infrastructure in interior cities. That infrastructure spending is economic stimulus itself, but it's only a first step. There are two major ways that China could develop interior regions, some of which -- like mega-city and success story Chongqing -- are already quite developed.

The first is by developing interior regions the same way that coastal cities developed: exports. China has gotten rich in part by urbanizing, which it's supported by selling lots of stuff to places like the U.S. and Europe. It can keep urbanizing in interior provinces, something it's attempted with those enormous infrastructure projects, including dozens of airports that are getting little actual use. Those projects are investments, and if they pay off by turning interior cities in the net Shenzhens, then that's great. But this means that these interior cities would have to start using all of this expensive infrastructure to build and sell things. If they don't and the investments fall through, that could make China's slowdown even worse. With the U.S., European, and possibly even Japanese economies struggling (Chinese trade with Japan is already down over the recent Diaoyu/Senkaku islands dispute), it's not clear that China will be able to find new markets for even more Shenzhen-style exports. The world can only buy so many iPads.

The second way that interior Chinese cities could start supporting China is if the country shifts to more domestic consumption. In other words, China would start selling products to Chinese citizens as well as to foreign buyers. In fact, China is already trying to do this, but it hasn't been easy. For Chinese consumers to start buying more products, they will have to become richer and more middle class, which would likely make China's exports more expensive on global markets. That makes the potential cost of moving those Foxconn factories into interior cities, away from shipping ports, even higher.

These are the sorts of choices facing forthcoming new leader Xi Jinping, who will lead a new cohort of Communist Party leaders starting next month. They're not easy, which may explain the resurgence of China "bears," but as the more optimistic "bulls" often point out, Beijing has achieved the impossible before.

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Olga Khazan · October 31, 2012