By Jacob J. Lew
Two years ago, China’s leaders charted a course to move to a more market-oriented, consumer-driven economy—a course that is not only in the best interest of China but also the rest of the world. President Xi Jinping’s visit to the United States this week presents a crucial opportunity to reaffirm that course and the rules-based international economic system that has enabled China’s remarkable economic rise over three decades.
The U.S. economy remains resilient and continues to be a major driver of the global economy. We have seen steady growth in jobs and output, following on swift and essential financial reforms and strong fiscal and monetary policies in response to the financial crisis some seven years ago. Yet the U.S. cannot be the only source of strength. This summer’s events demonstrate that China’s economic policies can have a significant impact on the global economy. While China’s financial markets remain domestically focused, a slowdown in its core economy raises concerns about spillover to other economies, particularly emerging economies.
The signals from Beijing over the last several months have been mixed. Restrictions on the purchase of foreign-technology products, and excessively broad reviews for foreign investments, have underscored long-standing questions about China’s business climate. After a period of yuan appreciation, the recent abrupt change to its exchange-rate policy led to a 3% drop in its value against the dollar and contributed to turbulence in international financial markets.
These policies, as well as the extraordinary measures taken to stabilize China’s stock market, have raised doubts about the commitment of the country’s leaders to allow market forces to play a “decisive role” in allocating resources. They have also unleashed new speculation about the prospects for China’s economy.
No one expected restructuring an $11 trillion economy to be easy. For decades China has relied on investment and exports to fuel its growth, aided by artificially low interest rates, protectionist measures to limit foreign competition, and a weak exchange rate. In the last decade alone, its economy has doubled in size. Delaying reforms would exacerbate the long-term challenges it is currently facing and restrain the transition within China that is so important to the global economy. But with the right reforms, China’s economic future can be very strong.
We have made clear to China’s officials that they need to keep the commitments they have made to the U.S. and the international community. We welcome China’s commitment to increase the transparency of its foreign-exchange reserves and exchange rate by fully subscribing to the International Monetary Fund’s Special Data Dissemination Standard by the end of the year.
Earlier this month, Premier Li Keqiang said that China would “never resort to a currency war.” At a G-20 meeting in Turkey in early September, China reaffirmed that it would refrain from competitive devaluation of its currency.
As President Obama said last week, we want China as a partner in maintaining the rules-based international economic system that enabled its rise over the past 30 years. It was the U.S. and others building and maintaining this international architecture that allowed China to experience a major economic transformation.
This architecture includes protecting intellectual property, ensuring that market forces play a decisive role in the allocation of resources, allowing foreign firms to compete fairly in the domestic market, conducting economic policy in a transparent manner, and doing its part to support global demand by promoting domestic consumption. In short, it is important for China to embrace responsibility commensurate with its size.
China’s officials acknowledge that returning to the policies of the past will result in a less-dynamic economy unable to meet the needs of the Chinese people. Beijing therefore should set its sights on policies that will further their reform agenda, such as targeted fiscal stimulus to boost consumption. Chinese officials also need to demonstrate their intent to allow the yuan to be subject to upward pressure that would drive the currency up, not just down.
The Bilateral Investment Treaty negotiations under way between the U.S. and China present a tangible way for China to signal to businesses in America and the world that it is serious about welcoming and protecting foreign investment. China relies on partnerships with U.S. firms to take advantage of our cutting-edge technology. It needs to provide fair market access and honor the rights associated with intellectual property for these relationships to remain strong.
A China that remains committed to market-oriented reforms presents an enormous economic opportunity to the U.S., given our innovative businesses and talented and diverse workforce. American companies are already doing well there. General Motors sold 3.5 million vehicles and Boeing delivered 155 aircraft to Chinese customers in 2014. Overall, the U.S. exported $166 billion in goods and services to China last year, an eightfold increase since 2000. As China transitions to a more consumer-oriented economy, that figure should climb ever higher, creating real opportunities for American workers and firms. This is good for China and the U.S.
Decisive progress on economic reform would result in a stronger, more stable and more balanced Chinese and global economy, which is in the interest of both countries. A firm commitment to that reform path by President Xi this week would demonstrate an important step in that direction.