BALANCING ACT

By+Zhiqun+Zhu

The next five years will be a crucial period for Chinas goal of building a moderately prosperous society by 2020—in celebration of the 100th anniversary of the founding of the Communist Party of China （CPC） in 2021. As the international media focus on Chinas annual growth rate following the Fifth Plenary Session of the 18th CPC Central Committee in October 2015， little attention has been directed to the daunting challenges in China and the blueprint mapped out at the plenum to tackle them.

China has become a highly influential force in todays world. Its no exaggeration that when China sneezes， the world catches a cold， as the Financial Times Martin Wolf once wrote. Can China continue to grow？ Will Chinas economic slowdown trigger a global recession？ Has China become more assertive in its foreign policy？ These are all legitimate questions but fail to address the real issues China and the international community today face. Three major sources of global misconstruction and anxiety over Chinas economy and foreign policy can be identified.

The mirror image

Perception and misperception color our understanding of international affairs. What one country sees in another is often the mirror im- age of itself. When Western countries reacted strongly to Chinas market tumble earlier this year， they saw a mirror image of themselves struggling with economic recovery. Westerners， especially Americans， always have a missionary impulse to change China in their image， either to Christianize it in the 19th century or to “democratize” it in the 21st.

Everyone is used to Chinas fast growth and is unprepared for anything short of miracles in China. From 1978 to 2011， China experienced unprecedented growth averaged at 10 percent annually. It replaced Japan as the worlds second largest economy in 2010. Its growth began to drop in 2012， declined to 7.3 percent last year and will likely continue to fall. China has entered a period of “new normal” of slower growth where it places quality and efficiency over quantity.

Chinas fast-running engine has hit roadblocks： rising labor costs， the inefficiency of state-owned enterprises （SOEs）， a deteriorating environment， a shrinking market in the West to absorb Chinese exports after 2008， etc. Chinas slower growth should not have come as a surprise. Overreacting to Chinas market fluctuations reflects Westerners frustrations with their own lackluster economies. The United States tends to either exaggerate or underestimate Chinas strength. It also worries about being replaced by China as the dominant global power without realizing Chinas policy priorities and challenges， or Americas own staying power.

Conflicting identities

Is China a global power or a large developing nation？ Is China abandoning Deng Xiaopings taoguang yanghui strategy that emphasizes economic development while keeping a low profile in international affairs？

Widely perceived as a global power， China is still a developing nation with 200 million people living in poverty. It suffers from the same problems other developing nations experience， such as a growing income gap and rampant corruption. Chinas per-capita GDP ranks 80th in the world and is only one seventh that of the United States.

China may still be playing second fiddle in international affairs， but it is actively reaching out and projecting itself as a major power. Nevertheless， the fundamental objectives of Chinese foreign policy—to create a stable international environment for domestic growth and to contribute to global peace and development—remain unchanged， as reaffirmed by President Xi Jinpings speech at the UN in October.

The China-initiated Asian Infrastructure Investment Bank， with 57 members including several U.S. allies， will become operational at the end of this year. Another ambitious program， the Silk Road Economic Belt and the 21st-Century Maritime Silk Road， or the Belt and Road Initiative， which integrates China with countries in Asia， Europe， the Middle East and Africa， covers 65 countries along the routes and has a projected investment of $1.4 trillion， dwarfing the Marshall Plan in relative terms， Americas post-World War II program for European reconstruction.

There is a significant domestic impetus behind these new initiatives. Many of the infrastructure projects proposed under the framework of the Belt and Road Initiative would benefit Chinas poor inland regions， potentially helping mitigate Chinas rapidly growing income gap and promote more balanced and sustainable growth. This will also allow China to relocate its labor-intensive and low value-added manufacturing facilities overseas and thus help resolve the severe environmental problem.

China has not just invested in developing countries； it is investing in the developed world now， from nuclear power stations in the United Kingdom to luxury hotels in the United States. More Chinese investment is set to move into various sectors of Western economies plagued with financial difficulties.

China has dual identities： While it is the worlds No. 2 economy， it is also a large developing nation. Its policies are sometimes inconsistent， trying to simultaneously satisfy the two sets of priorities. Chinas internal debate about its proper role in international affairs is inconclusive. As a result， other countries have difficulty figuring out what its intentions are and how to interpret and respond to its policy initiatives. With growing power come growing interests and responsibilities. The challenge for China is to remain focused on development and avoid unnecessary conflicts with other countries.

Economy in transition

China is undergoing two major transitions： from a planned economy to a market economy， and from the export-oriented， investment-driven growth to a new model based on consumption and innovation. China has room for continued growth. For example， household consumption accounts for 35 percent of Chinas GDP as opposed to 70 percent in the United States. Meanwhile， private businesses like Alibaba， Baidu， Tencent， Xiaomi， and Didi Kuaidi have become an inspiration for innovation and entrepreneurship in China. With the aim of making SOEs competitive internationally， China recently pledged measures to modernize SOEs， enhance the management of state assets and promote mixed ownership. These transitions and reforms will create disruptions and dislocations in China， which will inevitably affect other economies in this interdependent world.

Slower growth will create serious challenges to social and political stability in China. For example， there are over 270 million migrant workers who need to assimilate into urban lives. Development in west China needs to be energized to narrow the growth gap between regions. The rapidly aging population needs better healthcare and other social safety nets. The road ahead will not be smooth， but the Chinese Government seems determined and has been handling the transitions remarkably well so far. Despite an economic slowdown， Chinas toolbox is still full with the ability to stimulate continued growth： vast foreign exchange reserves， a huge domestic market， active economic diplomacy to boost export to new markets， etc.

For a long time to come， Chinas policy priorities will remain domestic. Chinese leaders will be preoccupied with tackling tremendous political， economic， social， environmental and demographic challenges in the years ahead. China is both a rising global power and a large developing nation. Adapting to the new conditions， challenges and opportunities associated with Chinas rise is the biggest test for China and the rest of the world.