World Economic Forum: China Looms Large

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Clearly, boosting consumption—now only 40% of GDP, vs. nearly double that for the U.S.—is a top goal in Beijing. China's intention of lessening its longtime reliance on investment, and above all exports, has a new urgency. Hit by rising labor and input costs, as well as the steadily strengthening yuan, China's export-led economy has already begun to slow. Indeed, the head of Tianjin Port, the world's sixth-largest port, said on the sidelines of the forum that he expects to miss his target of 20% growth in container box traffic for this year. "The first half of next year is going to be the most difficult period," added Tianjin Port Group (600717.SS) Chairman Yu Rumin in an interview with Bloomberg on Sept. 27. "Container traffic related to exports will be hurt the most."

The mainland's GDP growth is expected to slow to the single digits after several years of turbocharged growth. GDP growth this year will likely be 9.5%, and more than 8% next year, vs. 11.9% in 2007, predicts CLSA Asia-Pacific Markets. Much of this is due to a dramatic drop in net export growth (exports minus imports, or the portion of trade that contributes to GDP), down from a peak of 160% in February 2007, to negative levels in recent months. China's shipments to the slowing U.S. and European Union economies have been particularly hit, and many are expecting total exports—not just net exports—to decline next year.

"The American consumer is toast, finished," Stephen Roach, chairman of Morgan Stanley's (MS) Asia operations, said at the forum. That will have a dramatic impact on world growth, Roach said, adding, "Countries that have liked to sell things to Americans that Americans didn't need will be affected. Already, China's exports to the U.S. have been weakened."

Untapped Domestic Demand

But weaning itself off exports and boosting domestic consumption won't be easy, admitted Chinese officials. Many outside China hope the mainland's largely untapped domestic demand could eventually prove a major consumer of the world's goods, and so help boost global growth. Challenges to that economic goal include serious environmental problems and constraints on resources, China's aging population, plus uneven growth across the mainland, said Guo Shuqing, chairman of the China Construction Bank (601939.SS). "We have an imbalance in development between rural and urban and coastal and inland," Guo said. "We do face considerable difficulties," said Premier Wen during his keynote address.

Also a key question at the forum: leadership. Will China now be willing to take a larger international role, continue to open its economy to the world, and in particular play a leading role in the creation of a new financial regulatory system? To date, the nation has swung between sometimes proudly promoting its growing strength, but more often insisting on its continuing weaknesses. In particular, when confronted by demands to more quickly open its economy and move rapidly to free up its currency to market forces, China has long insisted that gradual moves are necessary given its still relatively young economy (30 years since opening began), plus the fact that hundreds of millions of Chinese remain relatively poor.

But with America's long-preeminent role in setting international financial norms now in tatters, the field is open. Indeed, pressure is building on Beijing to play a stronger role. With most of the world now waiting to see how deep the financial contagion goes, thoughts of what shape a new regulatory order might take are far from front and center—and that is the case in China, too. But in the coming months, Beijing almost certainly will advocate a newly strengthened, more assertive regulatory structure—a popular stance worldwide, too, in the face of the recent failures—as well as continue to promote the role of the state in guiding growth.

More Assertive China

"The Chinese would think there should be a larger role for the state, a stronger regulatory environment, and more of a state role in ensuring disaster does not occur," says Kenneth Lieberthal, a visiting fellow at the John L. Thornton China Center at The Brookings Institution who attended the forum. "This will be a very important next step in China's evolution towards becoming a responsible stakeholder. This is the first time that China potentially will become a substantial shaper of international rules," said Lieberthal, who also serves as an advisor to Democratic Presidential candidate Barack Obama.

And for now, Beijing is signaling its readiness to take a bigger role. "What we must have is international cooperation," said Liu Mingkang, chairman of the China Banking Regulatory Commission, on Sept. 27. "The degree of leverage nowadays is dangerous and indefensible. Worse, it is not regulated by any prudential supervision." As the financial crisis continues to unfold, there is no doubt that a more assertive China will emerge.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.