Wanted: A New Miracle

Can technocrats in Beijing pull this off? The country has an advantage: it has not yet leveraged its enormous domestic market. The service sector has huge potential. Consider entrepreneurs like Colleen Wang. Instead of employing low-wage metal benders, Wang's ad agency, Rayken, provides jobs for young, middle-class professionals: graphic designers, art directors, a couple of account executives and several copywriters.

This is unremarkable, of course. It's what advertising agencies do. What is remarkable is how few Chinese companies like Rayken exist. China's service industry is shockingly underdeveloped for an economy that will likely be the world's largest by 2050. In a country of 1.3 billion people, only about 5 million work in health care, just 2 million in jobs related to the environment and conservation, and only 4 million in banking and insurance.

This needs to change — and it has started to. Beijing's plans to increase the service sector's overall contribution to the economy by 3 percentage points by 2010 — to 43% of GDP — and by 10 points a decade from now. Earlier this year, the government ordered state-owned banks to step up lending to service-sector companies. Beijing has also begun to break down barriers that have prevented foreign companies from investing in highly regulated areas of the economy. Health care, which should generate an enormous number of jobs going forward as China's population ages rapidly, is one example. Taiwanese companies have already invested in 14 hospitals across the country — and see that as only the beginning. Says Michael Tseng, an executive at Taiwan's BenQ Corp., which runs a hospital in Nanjing: "China was the world's factory, but manufacturing is yesterday's story now."

How quickly a new story can be written may depend largely upon the Chinese people becoming a whole lot better at consuming more and saving less. But, while the authoritarian government continues to pull the strings in many parts of society, Beijing cannot simply order citizens to buy Gucci for the good of the country and the world. Chinese save much of what they earn because the government has yet to provide the web of social services available in other countries. China's national social security system and government health-insurance schemes are drastically underfunded, and moreover don't cover the millions of migrant workers who helped power the country to high growth but are now being laid off. The lack of safety nets demands frugality, as does Chinese cultural tradition that all but dictates that working children care for their parents as they age. Even ad-agency chief Wang takes care of her parents. This requires Chinese to accumulate very large nest eggs, particularly because China's longstanding one-child policy means there is often just one offspring caring for two parents.

The government is committed to freeing up discretionary spending. Earlier this year, Beijing vowed to double the size of the national social security fund, to $147 billion by 2010, and to steadily increase it from there. "This," says CASS economist Wang, "is like turning around an ocean liner. But at least we've started to turn."

A High-Tech Solution To economic policymakers, the real meaning of becoming a strong economy lies beyond getting citizens to spend more and expanding the service industry. The next Chinese miracle, at root, will mean becoming a first-rate technological power. China's road ahead was on display earlier this month in Shanghai, when a San Francisco – based company called the Cleantech Group hosted a venture-capital forum aimed at driving investment dollars toward alternative-energy entrepreneurs on the mainland. Opportunities appear to be plentiful, despite the dim economic environment. Forum attendee Patrick Tam, CEO of Beijing Tsing Capital, says he is investing heavily in Chinese clean-tech companies — most recently in a Beijing firm called NetPower Technologies, which makes a battery that helps power-hungry businesses reduce their electricity consumption. "The government is just letting the venture-capital market rip in this field," says Tam. "It's exactly what needs to happen to develop new technologies and new jobs in China. I think in a lot of ways this is our future."

It's a compelling vision: China as a high-tech powerhouse. But making it come true will take years, and there are major obstacles. Idea theft is the biggest. Though the country has made progress in strengthening intellectual-property rights over the past several years, rampant piracy of software, music and other IP remains a huge issue. "People with the ideas have to be protected," says Rosen, the New York City economic consultant. "They've moved on this because they know without it a high-tech China remains a dream."

The next miracle, in other words, may be harder to pull off than the last one. That doesn't mean it won't happen. Consider what, in 1978, constituted a "rich" eligible bachelor in urban China. He had to own a radio; he had to be able to buy his bride a fashionable wristwatch made by a state-owned company no one would ever confuse with Rolex. And he had to commute on the coolest set of wheels available: a bicycle called the Phoenix.

In just three decades, China remade its world. For all the challenges the country now faces, is it wise to bet against it happening again?