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Originally published Saturday, July 20, 2013 at 8:05 PM

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China’s reset may bring new opportunity for state

As a state that sells China billions of dollars’ worth of airplanes, agricultural products and other goods, Washington has a lot riding on the Asian giant’s latest economic transformation.

Special to The Seattle Times

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When China joined the World Trade Organization in 2000, the Clinton administration assured Congress this would lower barriers and cut the trade deficit. That year, it stood at about $84 billion, up from $10 billion in 1990.

Things worked out very differently. Last year, America’s trade deficit with China was more than $315 billion. The labor-backed Economic Policy Institute estimates this has cost 2.7 million American jobs, a figure supported by some other economists.

But Washington has been an outlier. Exports from the state to China grew from $2.9 billion in 2001 to more than $14 billion last year. China is our largest trading partner and we actually run a trade surplus.

It’s not just airplanes. Nearly 44 percent of Washington exports last year were agricultural products. Chinese goods are the backbone of container traffic in Puget Sound ports. Chinese tourists are an important and growing part of the hospitality sector.

Name a touchstone local company, and it has much riding on China. Microsoft employs 4,000 there and intends to hire more. Starbucks hopes to open 1,000 stores by the end of the year. Amazon is pushing to make the Kindle a success in the People’s Republic.

But China is changing, embarking on a massive, top-down reset. The big question facing Washington, and the world, is how much it will affect us.

I don’t claim to have an answer. One must be cautious in writing of “China” or “the Chinese,” as if they are monolithic.

Still, a transformation is aborning.

Back in 2007, then-Premier Wen Jiabao warned about China’s “four uns.”

Even as the nation was moving to surpass Japan as the world’s second-largest economy, it faced serious dangers. Beneath its powerful surface, he said, China was "unstable, unbalanced, uncoordinated, and ultimately unsustainable."

Now, new leadership under President Xi Jinping and Premier Li Keqiang is embarking on a dramatic strategy to rebalance the economy away from manufacturing, exports and investment in favor of consumption and services.

The reasoning isn’t hard to understand.

The Great Recession and the crisis in the eurozone showed China’s vulnerability as an export-driven economy dependent on external demand from America and Europe.

To keep growth going during the crisis, Beijing produced a huge stimulus package. Unfortunately, it also saddled the country with too much capacity, piled up dodgy loans to state-owned companies, and produced risky bubbles in real estate and other assets. At best, this was a temporary fix and did nothing to address the "four uns."

The evidence that Xi and the Communist Party are finally serious about a reset can be found in economic growth slowing to 7.5 percent in the second quarter. Exports slowed by 3 percent in June compared with the same month in 2012.

Some analysts have warned that growth could decelerate to 6 percent in five years and as low as 4 percent by the end of the decade.

In the developed world, that velocity of gross domestic product would be a boom. But for China, which typically clocked double-digit growth for decades, it is a startling slowdown.

And the leadership is not scrambling to push growth higher.

Not only that, but the Chinese central bank sent a tough signal to the country’s shadow banking sector, essentially engineering a momentary liquidity crisis, as a warning that these institutions needed to lower the risk and the high debt taken on during the recession.

One of the smartest China watchers I know is Stephen Roach, former chief economist of Morgan Stanley, chairman of Morgan Stanley Asia, and now at Yale. He’s also a believer that China can pull off this transformation.

Writing on the economics site Project Syndicate, Roach said China’s plan depends heavily on moving more people into cities, increasing employment in the services sector and strengthening its social safety net.

“Urbanization is a building block for consumption, because it provides powerful leverage to Chinese households’ purchasing power,” he wrote. “Urban workers’ per capita income is more than three times higher than that of their counterparts in the countryside.”

The strategy faces considerable obstacles, including debt bubbles of local governments, popular discontent over pollution and corruption, millions still living in poverty, a rickety banking system and the ability of the leadership to stay the course against powerful Communist Party members who prefer the status quo.

Last week, the International Monetary Fund issued a warning that Beijing needed to enact a number of reforms to avoid increasing vulnerabilities.

If China succeeds, America and Washington might be big winners.

Private consumption in China is around 36 percent of GDP compared with more than 70 percent in the United States. A rising and spending Chinese middle class would represent a great opportunity.

Grabbing it depends partly on whether China will be more open to American exports. Beijing has operated with a variety of stealth protectionist tools.

Can the White House persuade China to play by our rules of liberal capitalism? Probably not. But it might pry open the market more.

A reset China will also be less likely to be America’s biggest foreign holder of Treasurys (in May, they hit a record $1.316 trillion).

Under the existing export-heavy model, Beijing has needed to put its dollars somewhere and Treasurys represent the safest haven. But they are also part of an unhealthy imbalance.

So what happens next? The only certainty is China really seems committed to change.

Napoleon is said to have mused that “when China awakes, the world will tremble.”

This reset will move the Earth, but not necessarily in a bad way.

You may reach Jon Talton at jtalton@seattletimes.com

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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