FACED WITH signs of a potentially sharp economic slowdown, Chinese authorities are demonstrating what makes their country different from other nations struggling to avoid recession. In April — a month in which key indices of Chinese growth plunged — the state’s National Development and Reform Commission approved 254 new investment projects, worth tens of billions of dollars. Last week, according to the Wall Street Journal, it approved $20 billion in spending on just two steel factories. Officials say decisions on new nuclear plants are in the pipeline; meanwhile, bank reserve requirements have been eased and lending rates are dropping.
In short, China is no Greece, or even Germany. Its Communist leaders have plenty of means to combat economic sluggishness — which in China’s case means a growth rate of 7 or 8 percent, rather than the usual double digits. With a less-than-smooth leadership transition underway, the government has made it clear that it will be “giving more priority to maintaining growth,” as Premier Wen Jiabao put it last week. In the short term, that is good news for the rest of the world — particularly that part that has come to depend on exports to a booming China.
In the somewhat longer run, however, China’s stimulus policy is troubling. It means the perpetuation of a growth model that increasingly looks unsustainable — one based on continuous growth in investment. Beijing adopted the strategy when exports and foreign investment slowed after the 2008 global financial crisis. While much of the spending is worthwhile — the country’s sparkling new airports and highways will propel more growth over time — more and more of it looks questionable. High-speed trains have literally crashed. Forests of apartment towers are rising around Chinese cities, inflating what looks to many like a real estate bubble. And who will buy the steel of those vast new plants in a market currently so glutted that one mill has switched to raising pigs?
To keep growth going — and its political system stable — beyond the next several years, China’s incoming leaders will have to embrace a very different strategy, one that would produce different winners and losers. Resources must be diverted away from wasteful investments by state-owned companies and toward average consumers. That means tax cuts, higher interest rates on savings and liberalization of financial markets to allow savers to invest in something other than housing. Social services like health care must be expanded. Private firms and foreign investors need better guarantees of property rights and the rule of law.
The hardest change may also be the most important: China needs to accept slower, as well as better, growth. That, in turn, means altering the implicit compact of the Communist Party with the population, which for a generation has accepted continued one-party dictatorship in exchange for rapid development. As the party leadership changes hands, both sides of that equation are under strain. The new leaders will need a strategy for political as well as economic change.