When Treasury Secretary Jack Lew went to China this week, the usual thorny topics came up with Chinese government leaders: trade, currency manipulation, intellectual property protection, plus an extra dose of finger-wagging about recent cyberattacks.
But there’s something going on in China that will have far broader ramifications for the U.S. economy beyond any one of these issues: China’s new leaders have pledged a massive economic overhaul, the likes of which hasn’t been seen in the country since the 1990s.
Everyone will be watching to see whether China can pull it off; the project will take a number of years. But if you think the economic relationship between the United States and China is complicated now, just wait until the Chinese leadership tries to transform the very structure of the world’s second-biggest economy.
Americans are used to thinking of the Chinese economy as an ascendant, unstoppable juggernaut, the world’s endless source for cheap goods. And it’s easy to envy a country with growth projections this year between 7 and 8 percent, while the United States is still bobbing around 3 percent.
But the source of that growth, China’s leaders and many experts have concluded, is unsustainable. An advanced economy depends largely on domestic consumption (although some argue that the United States has gone too far in that direction). In China, consumption makes up a relatively small portion of the economy. Instead, the twin pillars are exports and investments, and they are both hitting the limit.
Exports have famously turned China into a manufacturing powerhouse. But they have also left the country vulnerable to the ups and downs of other nations’ economies. Witness the recent upheaval in Europe and the United States. Likewise, China’s boom in investments has powered massive infrastructure projects. But it’s also created a frothy real estate market, which alone accounts for more than 10 percent of the country’s economic activity.
Lew met this week with Li Keqiang, China’s new premier and the country’s most powerful man when it comes to economic policy. With a PhD in economics from Peking University, Li is considered a serious thinker bent on overhauling China’s economy. Reuters reported earlier this week that Li’s lieutenants include a number of high-profile officials who helped Zhu Rongji, China’s premier from 1998 to 2003, reform the country’s state-owned companies more than 10 years ago.
“It was clear from the discussions that China has made a serious commitment to their reform agenda,” Lew told reporters at the conclusion of his two-day visit to China. “The dominant theme was what can be done to generate more domestic demand and more growth.”
Transforming China’s economy is a gargantuan task but one that China’s leaders may think is necessary for their political survival. There are domestic pressures for reform. Unemployment among college graduates has become a chronic problem since China has plenty of low-paying manual labor jobs but few opportunities for skilled, white-collar workers. Meanwhile, entrepreneurs trying to build private businesses often complain about competing against state-funded firms that benefit from the support of corrupt local officials.
Whether China’s current crop of leaders succeeds in the project could even determine how much longer the Communist Party stays in power and, in turn, what the United States’ relationship with the country will look like for years to come.
Lew will presumably be studying up on China as he steps into his new Cabinet role. His two predecessors in the Treasury Department, Henry Paulson and Timothy F. Geithner, were known as China buffs. Lew’s trip this week was his first to the Middle Kingdom.
He appears to be off to a good start. Lew’s squeaky-clean image in the United States seemed to translate well in China, where the country’s famously opinionated netizens weighed in on his lunch choice in Beijing. Lew and three colleagues ate at an ordinary dumpling place in Beijing where the bill totaled $17.
The Chinese, who are used to seeing government officials eat like kings, were pleased with Lew’s pick, as they were with Vice President Biden’s similarly modest meal in Beijing in 2011 and U.S. Ambassador Gary Locke’s decision to fly to China in economy class.
“After reading today’s news about Lew’s 109 yuan dumpling meal, I was reminded of Joe Biden’s 79 yuan meal in a small Beijing eatery, and Gary Locke’s flight to Beijing in an economy class cabin,” said scholar Xu Xin on Weibo, China’s Twitter equivalent, according to the South China Morning Post. “I also think of the hundreds of billions of yuan our public servants spend each year on meals, transport and overseas trips, and children in rural China who can’t afford clothes, food or school furniture.”