After the Olympics: What Are China's Prospects?

The world’s spotlight has been on China, following its unprecedented economic growth and emergence onto the global stage. But what are China’s post-Olympics prospects? There are three distinct perspectives on its economic outlook:

The first view dismisses China’s issues as inconsequential and unlikely to impede future growth. The second concludes that China will face strong headwinds and experience a dramatic slowdown, if not an economic crash. The final, and most interesting, perspective bridges these views. It acknowledges that while China has a number of problems that will slow future growth, the government has a remarkable ability to adjust. The result will be an end to double-digit growth, but the beginning of a period of structural adjustment. And this is where new opportunities will emerge.

To understand why this third perspective is right, we must consider the strategies that helped China achieve its growth over the past two decades. Cheap labor and underpriced materials kept costs artificially low, creating the unbeatable “China price.” It also emphasized high investment and high exports. Along with this, the government diverted funding from essential public services. Visitors to China are struck by the paradox of first-world infrastructure and third-world social services.

Combined, these strategies powered China’s growth, but the end of the summer Olympics provided a fitting full stop to this golden era.

Finding Opportunity in Crisis

Today, China faces several structural imbalances in its economy. The most obvious is between investment and consumption. China’s consumption as a percent of GDP has fallen by 10 percent in the past decade, while investment has grown from around 36 percent of GDP in the early 1990s to the mid-40s today.

An emphasis on manufacturing has come at the cost of an underdeveloped service sector: Nearly half of China’s GDP is in manufacturing, with only 39 percent in the service sector. By comparison, 28 percent of India’s GDP is in manufacturing and 54 percent is in the service sector; Brazil has 31 and 64 percent respectively.

By underinvesting in social services—healthcare, education and the environment—China has created a social deficit, requiring more investment from citizens. Over the past 20 years, government spending on healthcare has fallen by more than half, whereas individual spending over the same period has doubled. The story is the same for education. In looking at environmental protection, the government is underinvesting by about $50 billion each year.

It is in these neglected areas, however, where new opportunities will emerge. We will see China shift its focus from manufacturing and foreign direct investment to domestic consumption, environmental protection, social services and the service sector. We will also see a wave of investments overseas, offsetting its dubious distinction of being one of the biggest creditors to the world’s richest economies.

China’s reform record reveals a clear pattern: crisis forces the government to take action on policies it talked about, but made little real progress on. So if we rely on history as an indicator, we shall see China gradually reorienting its economic growth strategy toward a much more sustainable direction.

Dr. Minxin Pei is a senior associate in the China Program at the Carnegie Endowment for International Peace. His research focuses on democratization in developing countries, economic reform and governance in China and U.S.-China relations.