China's Galloping Economy: Problems, Prospects, and Implications for the United States

China's economy has grown faster longer than any other in history, making its future growth a key topic of interest for both domestic planners and international onlookers—but the conditions for that growth may be coming to an end. When four expert panelists convened at the Woodrow Wilson Center on January 22nd, 2008, at a seminar jointly sponsored by the Asia Program and the Program on Science, Technology, America, and the Global Economy, they made it clear that China's economic future is uncertain and, importantly, tied to global economic conditions. Their combined recommendation is to rebalance the economy, using monetary policy, to: reduce reliance on capital investment and exports (while allowing the currency to appreciate faster), develop financial markets, create better social safety nets, increase energy efficiency, and continue innovation through improved quality of research and enhanced intellectual property protection.

Barry Naughton, a professor of Chinese economics at the University of California-San Diego, described the last 30 years of China's economic history. He explained that growth has been due to increased privatization and diversification and reached its peak in the years 2004-2007. During that period, the entire world economy grew and "China played an important role in this global process." Looking forward, however, Naughton emphasized that China's economic fate is aligned with that of the United States. In addition, Naughton noted that the endless supply of low-wage rural labor was beginning to dry up. Further, the Chinese economic leadership shows signs of uncertainty, in part due to the fact that there are more politicians and fewer technocrats among new state council members. Moreover, signs suggest that trade surpluses will likely level off.

Steven Dunaway, deputy director at the Asia and Pacific Department of the International Monetary Fund, expanded this discussion of economic history and added his perspective to China's current attempts at rebalancing. Chinese investment over the decades has contributed to 10% growth per year, on average, but has also created the potential for sector overcapacity, downward sloping prices and profits, and bank loan defaults. Price distortions will inevitably even out, prices will rise, and exports will fall. In order to maintain growth, Dunaway made the following policy advisements: increase the cost of capital through tightened monetary policy, improve the allocation of capital, modernize financial markets, and improve the social safety net through education spending and pension reform.

Moving from an overall economic outlook to an energy-specific forecast, Jeffrey Logan, a specialist in energy policy with the Congressional Research Service, described how industrial growth in China has affected and will continue to affect energy use. The shift to heavy industry has more than offset efforts at energy efficiency, driving up energy demand. As Logan put it, industrial policy has dominated energy policy. Moreover, while China's goal is to reduce energy consumption by 20 percent over the next few years, Logan pointed out that China's recent industrial surge runs counter to this policy. Additionally, all this industrial output has extremely negative effects for the environment. One startling statistic is that air pollution alone is responsible for up to 750 thousand deaths in China per year. China relies on coal for 65 percent of its energy requirements; from 2000 to the present, the number of coal-fired power plants that China has built is the same as the number that the United States has built throughout its history.

Finally, Cong Cao, senior research associate at the Levin Institute of the State University of New York, spoke to China's innovation and stabilization strategy. The positive characteristics of past economic growth, he explained, include internal stability due to strong foreign investment, science and technology reform in the 1980s and 1990s, and an increase in international exposure. The commitment to innovation has been evidenced in strong R&D spending, the creation of a large talent pool, increased foreign direct investment, and the achievement of a more technological society. In spite of these successes and the prioritization of science, technology, and education, however, China has faced several challenges: while the volume of scientific papers is high, they are seldom cited by other researchers; intellectual property protection lags; and its best and brightest students often leave the country to work or study abroad. Cao noted that China intends to build indigenous innovation on three complementary elements: Chinese innovations, the improvement of imported technologies, and the integration of imported technologies. China's political leaders have set a goal for China to become an "innovation society" by 2020. One of the specific targets to accomplish this goal is raising R&D as a percentage of GDP from 1.41 percent to 2.5 percent, the average for most developed countries.

Drafted by Jacqueline Nadir, STAGE Program Assistant
Edited by Kent Hughes, STAGE Program Director, and Mark Mohr, Asia Program Associate