World Economy

China Shifting Towards Less Centralized Economy

China Shifting Towards Less Centralized Economy China Shifting Towards Less Centralized Economy

While this week's gyration in global stocks is seen by many as stemming from a troubling slowdown in Chinese growth, the country's problems also point to a more important shift that is easy to lose sight of in the whirl of market tickers: a country whose economic transformation is on overdrive.

Under this view, signs of distress in the world's second-largest economy–from an overheated real estate sector and stock market bubble to mounting labor unrest–are not evidence of decline, but rather the inevitable symptoms of China's shift toward a less centralized economy powered by upwardly mobile masses of consumers, CBS MoneyWatch reported.

For years, after all, this is what China's leadership has promoted as a guiding principle of economic development, encouraged by the US and other developed nations eager to tap into the planet's biggest market.

Nicholas Lardy, an economist with the Peterson Institute for International Economics and an expert on China, says the country's recent stumbles show how quickly it is moving to hatch a new economy. And focusing only on China's industrial output to determine the health of its economy amounts to using "old metrics" that no longer reflect today's China, he said.

"The service sector is now driving growth," Lardy said, alluding to China's move away from a manufacturing-driven economy to one based on personal consumption, like the US.

Yuan Not Undervalued

Lardy notes that China's move this month to devalue its currency, the renminbi, so that it better reflects market conditions is something China's critics have demanded for years. The move also indicates China's wish to have its currency in the basket of global reserve currencies that now include the dollar, euro, pound sterling, and yen. The International Monetary Fund has praised China's recent currency moves and maintains the yuan is still not undervalued.

To be sure, the days of double-digit growth in China are almost certainly over, and it remains to be seen if the country's central planners can avoid a "hard landing" for the economy. But it is also easy to overstate China's economic woes, said Don Kowalski, an economist with CoBank, which serves the US agricultural sector, noting that China is today the largest foreign market for American farmers. US exports to China account for just over 1% of America's GDP.

China's Growth Double the US

"There's been a lot of anxiety about China over the last few weeks, but the reality is they are still growing twice as fast as we are here in the US," Kowalski told CBS MoneyWatch.

More than twice as fast, if Chinese policy makers are to be believed. Beijing's most recent growth figures put gross domestic product this year at around 7%, compared with slightly over 2% for the US.

Consider that 35 years ago, 64% of China's population lived on just a dollar a day. Today, just 10% of Chinese households live in that kind of extreme poverty. Chinese wages have also been on the upswing. And unlike in the US, income inequality in China, while still high, has declined in recent years.

China pumped 140 billion yuan ($21.8 billion) into its economy on Wednesday, in the central bank's latest bid to shore up slowing economic growth and waylay investors fears of a "hard landing."

The People's Bank of China injected billions of yuan into the interbank money market via a short-term liquidity operation, the bank said on its website. The loans mature in six days and have an average weighted bid rate of 2.3%.

Wednesday's action came at a time of extreme market volatility in China and increased intervention by the central bank.