Crucial Decisions for China

There will be little time for Chinese leaders to sunbathe in Beidaihe, the seaside resort east of Beijing where they huddle this time of year to grapple with policy issues. Their plate is heaped with pressing economic issues, deteriorating relations with Taiwan and threats to social stability. The officials must emerge from the conclave with a determination to carry on with economic reforms, a decision to return to trade negotiations with the United States and a toned-down foreign policy rhetoric.

China’s economy, though still showing quarterly growth of about 7%, is losing momentum. To revive it the Communist leadership has been looking at the U.S. model geared to reinvigorating growth by stimulating dwindling domestic consumption. The regime is propping up employment by pumping huge sums of money into the economy, cutting interest rates and trying to bolster bank lending. In a move ultimately dismissed on Wall Street as a fool’s game, Beijing even tried to spur investment on its stock markets so as to duplicate America’s “wealth effect,” investor confidence generated by rising stock markets.

None of this has produced much. Consumer spending has not budged from its 21-month low, and savings continue to rise.

The key ingredient that Beijing forgot to add is consumer faith. In the United States, consumer confidence is at a 30-year high; in China, it’s declining. Foreign capital, so crucial for China’s economy, has been diminishing as well, as the risks to investors increase.

Government spending will help keep China’s economy afloat if aimed at building infrastructure rather than propping up unprofitable state companies. But priming the pump will go only so far. Devaluing the yuan could also provide temporary relief by boosting exports. But neither remedy would assure sustained growth. For that, Beijing must carry out structural reforms along the lines of those demanded by the United States and Europe as a condition to China’s entry into the World Trade Organization.

Key in the WTO talks is the opening of China’s financial, telecommunications, distribution and other service sectors to outside competition. As in all market economies, services represent the fastest-growing segment, generating more jobs than any other. Liberalization, backed by Beijing’s commitments to the WTO, would boost the inflow of new technologies and capital, and this would enable China to launch the politically tricky task of shutting down unprofitable state companies.

That is a tall task, and not enough. Beijing should also move away from its belligerent verbal campaign against Taiwan. True, it was Taipei that invited Beijing’s wrath with ill-advised talk of two Chinas, a formulation that upset the creative ambiguity on which their relationship has been built. Beijing’s threats of war and military provocations against Taiwan undermine confidence in regional peace.

Unless China opens up to outsiders as a friendly giant, the nation’s 50th anniversary in October and others yet to come will be occasions of hollow celebration.