For all its political intrigue over the years, China has had a relatively clear economic strategy, at least until recently. In the last few weeks, however, its approach to managing its exchange rate has puzzled those who closely follow it. The move by China’s central bank on Friday to cut interest rates adds to the surprise, as does talk of further monetary stimulus.
At the risk of some over-simplification, China’s economic strategy has been steadfast in making a gradual transition from a growth model heavily reliant on exports and public investment to one driven much more by domestic consumption and private investment. This is part of China's broader “middle income transition,” as the development stage is known, that faces challenges in today’s weakening global economy, as well as from the historically entrenched power of inefficient state-owned enterprises and "bubblish" pockets of financial excess.
Most important, China’s leaders are determined to make this transition without a significant economic slowdown: Maintaining an average annual growth rate in the 7 percent range is seen as critical to social and political stability.
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