On February 27, 2012 the World Bank published a 6 point priority reform prescription called China 2030: Building a Modern, Harmonious, and Creative High Income Society. These reforms include reducing government involvement in the economy, innovating instead of stealing others' inventions, going "green" to reduce China's cost advantage, ramping up government provision of social security, collect more tax revenues, and behave in a more collaborative manner on the global stage.
Since then we have seen a sharp slowdown in the growth of the Chinese economy linked to a drop in exports to a Europe trapped in an austerity death spiral, a leadership transition turn turbulent with the ouster of the aspiring princeling Bo Xilai, and an escalation of social discontent accompanied by a boost in state suppression of dissidents. China staved off much of the potential fallout of the 2008 Crash by embarking on a $585 billion fiscal stimulus program aimed at infrastructure development, which created a post-crash commodity price boom that served the resource sector very well. China provided an additional domestic boost through a credit expansion that fueled a real estate development bubble which is now fizzing. As China worries about the reliability of its American and European export markets it is contemplating another round of fiscal stimulus, though this time it is considering a focus on measures to boost domestic consumption rather than pointless Japanese style infrastructure spending.
Given the World Bank's prescriptions that China should change itself into something that the Republican Party is urging America to move away from, I've been wondering how the Chinese will stickhandle a face-saving solution to its slowdown problem. I found a clue buried inside my Saturday NYT hardcopy where I spotted a worrisome article China's Uncertainties May Drive Wave of Nationalism. The writer Andrew Jacobs describes what appears to be an orchestrated wave of Chinese xenophobia during the past week. It seems that China has decided to distract its citizens by scapegoating foreigners in what amounts to a pushback against the World Bank prescriptions while it sorts out its leadership transition. I'm not sure that letting this genie out of the bottle won't backfire on China's leadership. It does provide more weight to the argument that it is unwise to concentrate productive capacity in a jurisdiction whose competitive advantage rests on dumping costs on a majority which has an unprecedented level of networked communications ability.