Wanted: A New Miracle

Wang Shaobi was just 7 years old, growing up dirt poor in southeast China, when the world she would inherit changed forever. It was 30 years ago this month — December, 1978 — when China's leadership decided the time had come for their country to open up its economy and to embrace something akin to capitalism. The monumental shift — China under Mao Zedong had been a centrally planned economic disaster — reflected the growing, behind-the-scenes influence of a man few in the West had then heard of: Vice Premier Deng Xiaoping. China, the ruling Communist Party decreed back then, "required great growth in the productive forces." And Deng was smart enough to know that that could come in only one way. China would get on the road to capitalism.

Today, Wang, who has chosen a Western name, Colleen, works in a gleaming office tower in the manufacturing center of Guangzhou in southern China. At age 37, she is the very image of a polished chief executive officer, right down to her Milano briefcase. Wang is the founder of an advertising agency that employs nearly 70 people in three Chinese cities and counts as customers major multinational companies including Procter & Gamble and Sony Ericsson. Like so many of her generation, Wang never looked back after racing through the door Deng's economic reforms opened, and her accomplishments show how far the country has come. But they also show that China's capitalist road is leading toward a wall — that the first phase of its 30-year economic miracle has run its course.

Every day now at the Guangzhou train station, just a few miles away from Wang's office, hundreds of migrant workers wait to start the long journey back to their home provinces. They have been laid off from jobs working in toy and textile factories, and from construction sites throughout what used to be a booming province. Among them is Zhang Dingli, 36, who worked in a toy factory for a decade. But in early November, the plant closed. He is a victim of an economic transition — a move away from the low-end, low-wage, export-oriented manufacturing on which much of China's rapid growth was built — that has been made more urgent by the global economic crisis. As China's double-digit growth rate plummets, thousands of factories are being shut down and millions of workers are being thrown onto the streets. They will need jobs in the years to come, and the Chinese government is scrambling for an answer to Zhang's plaintive question as he prepares to return to his native Sichuan province: "What am I going to do after I get home?"

China needs a new economic miracle — and the trajectory of the global economy may depend on whether one can be conjured up. China, theoretically, should be one of the locomotives that will eventually help pull the world out of its slump. That won't happen overnight; overhauling the world's fourth largest economy is going to take some time. For the moment, to tread water, Beijing is frantically throwing money at infrastructure projects, much as U.S. President-elect Barack Obama now promises to do in America. But ditch-digging on a national scale, Beijing knows, will not take China where it needs to go. Only if leaders execute a series of complex alterations to the foundations of its economic growth will China maintain its momentum. "The [global slump] is absolutely accelerating the fundamental changes that were already taking place," says Daniel Rosen, a principal at the Rhodium Group, a New York City – based economic-consulting firm. "The Chinese may have understandably felt entitled to relax a bit after 30 years of wrenching change. Unfortunately, they can't."

Turning Savers into Spenders the goal for china's transition sounds straightforward enough. "We've become a big economy," says Wang Zhenzhong, an adviser to the Chinese government and director of the economic-research institute at the Chinese Academy of Social Sciences (CASS). "Now, we need to become a strong economy." In a nutshell, this means becoming a bit more like Japan by developing domestic, technologically formidable manufacturers, rather than just making a lot of inexpensive stuff for the rest of the world. It also means becoming a bit more like the U.S., where factory jobs have over the years been supplanted by the growth of the service sector and knowledge-based companies. China's need to emulate America may seem counterintuitive at the moment, given the parlous state of the U.S. economy. But it is precisely because tapped-out American consumers have stopped buying Chinese-made goods that this economic rebalancing act needs to proceed with haste. The country's factories need new customers. Chinese consumers can fill that void, by spending more and reducing their stratospherically high national household-savings rate, which stands at more than 25%, compared with a savings rate in the U.S. that hovers near zero. China needs to start creating new jobs by boosting its underdeveloped service sector, which contributes just 40% to overall GDP, compared with 79% in the U.S. In that way, the country can reduce its dependence on exports and continue to grow, thereby increasing its role as an outlet for the goods and services produced by the rest of the world.