Wanted: A New Miracle

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Migrant construction workers like these Beijing commuters are becoming casualties of China's economic slowdown

Ian Teh / Panos

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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 slashing interest rates and frantically throwing money at infrastructure projects, much as U.S. President-elect Barack Obama 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 China's economic growth will the country maintain its momentum. "The [global slump] is absolutely accelerating the fundamental changes that were already taking place," says Daniel Rosen, a former senior adviser in the Clinton Administration, now 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 over the years, factory jobs have 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.

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 Huang. Instead of employing low-wage metal benders, her ad agency, Rayken, provides jobs for young, middle-class professionals: graphic designers, art directors, a couple of account executives and several copywriters.