China suffered a further slowing of its economy last year, with its real-term GDP growth posting 6.9 percent -- the lowest since 1990, the year after the Tiananmen Square incident.
Certainly, a country cannot infinitely enjoy high growth driven by development and exports. It is only natural that a country's economic growth slows down as its economic development approaches its maturity.
The challenge lies in whether China can transform its economic structure without a hitch. According to statistics released by the Chinese government, the ratio of the service sector in the country's overall industry topped 50 percent for the first time, while that of the manufacturing sector dropped to 40.5 percent. This comes as no surprise considering that reduced production continues in the country's material industry, including the steel industry laden with excessive production capacity.
Such a process is inevitable when a country's economy is shifting toward consumption-driven growth. It is essential for China to exert efforts in turning the current trend into a steadfast one. The country will need to promote deregulation and expedite administrative procedures to encourage private companies to churn out goods and services that meet consumer demand.
One source of concern is the seemingly endless capital drain and the weak yuan. The foreign speculative funds that were once flowing into China in quest of high returns are now turning to outside the country due in part to the interest rate hike in the United States. A countermeasure via an interest rate raise by the People's Bank of China (PBC) could only result in cooling off the country's economy. If the PBC cuts interest rates to stimulate the economy, however, it could spark a further fall of the yuan and capital exodus. China's financial policy is in a sort of Catch-22 situation.
Amid such difficulties, China is tasked with steadily carrying out the yuan's globalization and the liberalization of its financial market. If the country is to scramble to carry through currency and market reforms while international confidence in the country remains low, that could result in major chaos.
The Communist Party of China has set a goal of doubling national income over a decade up to 2020. If the party is to stick to the growth target and turn to conventional pump-priming measures in order to prioritize maintaining its order, it would not only delay necessary reforms but also lose the country's credit.
It is also essential for China to strive to raise market and international confidence by improving the credibility of its statistics and implementing aggressive disclosure of information and rule-based governance, among other measures.
The Asian Infrastructure Investment Bank (AIIB), which was launched at the initiative of China, will serve as a litmus test for Chinese economic policy. If China was caught exploiting the AIIB for its own benefit, the country would be dealt the most serious blow with its international credibility undermined.
China faces trials and tribulations ahead for becoming a stable and affluent major power by reordering its economic structure. Japan, on the other hand, will also need to shift its awareness on the premise of slowing Chinese economic growth.