By most accounts, the Beijing Olympics have been a huge success as a worldwide spectacle. From the host country’s perspective, it was a challenging build-up as it dealt with the heightened international scrutiny of its human rights record, blighted among other things by the uprising in Tibet a few weeks before the opening ceremony. But the Chinese authorities got things under control, not just demonstrating their organisational capabilities but also emerging with the largest haul of gold medals. Now comes the hard part. After months of being focused to the point of obsession on the Games, the country and its leadership have to get back to the more mundane but also more challenging task of steering the economy, not just through the immediate global turbulence but also through the transitions that lie ahead.
The near-term challenges stem from the simultaneous slowdown in growth and acceleration in inflation. While the Chinese economy does not appear to have been significantly impacted in the first half of the year, it is unlikely to remain immune from the way in which the global economy, particularly the US which is its largest market, is performing. The anticipated recession in the US over the next few months could hurt a Chinese economy that will have to deal also with the post-Games lull. While the Chinese dependence on exports for growth has reduced significantly as domestic consumption and, particularly, investment have become far more significant in recent years, it certainly hasn’t disappeared. One indication of the government’s concern is the movement of the currency, which, in recent weeks, has moved up against the dollar somewhat faster than the authorities may like. As aggressive domestic investment plans are scaled back because of inflationary pressures, a slowdown in export growth (prompted by the more expensive currency equation) poses a greater threat. On the inflation front, China’s significance as a consumer of commodities, ironically, reinforces the threats that it faces. The more it consumes, the more global prices are driven up and the more inflationary pressures it, as well as everybody else, faces. Finding a new, sustainable growth-inflation trajectory that is not globally destabilising, is what the leadership needs to think about.
The search for solutions to immediate concerns should not come in the way of addressing the longer-term issues that will impact economic performance. Domestically, China will have to deal with a rapidly changing demographic pattern, with the proportion of senior citizens reaching levels that today’s developed economies attained at far higher levels of per capita income. Financing growing old-age safety nets even as the productive labour force declines is a fundamental challenge. From an external perspective, China is already acutely aware that it cannot sustain its national standard of living without significant supplies of food, energy and other commodities from the rest of the world. It has, as a consequence, begun to secure its supply lines across the world, significantly increasing the potential for conflict with other major consumers. This requires a fundamental shift in the worldview of its leadership and developing the ability to deal with other countries in a more co-operative and collaborative way.