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Dilemmas of China’s success

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In Brief

Over the next decade, China will face a suite of daunting economic challenges more politically difficult than those it has grappled with over the past three decades.

China’s new leadership must address an unsustainable status quo


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: a state-centric economic model that has exceeded the limits of utility; a steep environmental cost for its breakneck development since 1979; and an entrenched political elite whose legitimacy is increasingly being called into question by endemic corruption, a lack of both transparency and accountability.

And these challenges operate in a fluid regional security environment shaped by Beijing’s assertive behaviour in Asia, which has raised concerns among its neighbours from India to Vietnam.

In addition to its structural economic issues, China will have to manage a new wave of urbanisation which is projected to add 350 million to its cities by 2030, bringing the total urban population to about one billion. By 2025 there will be 221 Chinese cities with one million or more people living in them. By comparison, Europe today has 35 cities with a population of over one million. This historically unprecedented urban expansion highlights China’s dilemma at a time when robotics and the digital economy are redefining work. For example, FOXCONN, which employs 1.2 million Chinese and assembles some 40 per cent of the world’s consumer electronics, has announced it will purchase one million robots over the next three years.

Chinese leaders must also deal with unprecedented forms of individual empowerment from a rapidly expanding middle class that harbours rising expectations and festering resentment over corruption, environmental damage, and increasing inequality. This includes the 500 million Chinese citizens who use the internet, and the hundreds of millions who use Weibo, China’s microblogging Twitter-like service, in a country that collectively owns over 700 million cell phones.

There are clear signs that China’s leaders recognise the need for reform. The legitimacy of the Communist Party is based on performance, and more than three decades of double-digit economic growth have been the foundation for the success of this de facto social contract. But China’s leaders know that its investment-driven export model is unsustainable. This was the premise of China 2030, a report released last year that was co-sponsored by the World Bank and the Chinese State Development and Reform Commission, a leading policy body. China 2030 clearly outlined that sweeping reforms aimed at creating a greater role for private markets, increasing competition and strengthening the rule of law will be necessary if Beijing is to realise its goal of becoming, ‘a modern, harmonious, creative, and high-income society’. Importantly, the report argues that ‘reforms of state-owned enterprises (SOEs) and banks would help align their corporate governance arrangements with the requirements of, and permit competition with, the private sector on a level playing field’.

Yet there have been few signs that the leadership has a strategy  to implement such reforms, despite the fact that newly installed President Xi Jinping and Premier Li Keqiang, along with some members of the standing politburo, are viewed as reformers.

If Beijing does have a game plan for achieving its strategic goals, then it is certainly not an obvious one. Where does this leave us? Below are three alternative futures offered as a heuristic tool to think about possible outcomes of China’s current strategic and policy options.

Harmonious world: In this best-case scenario, China allows the renminbi to become convertible, and begins over the next five years begins to strengthen the rule of law and move its financial system to a more market-based allocation of resources. Consumer-driven growth sustains a 6–7 per cent annual growth rate as China decreases its reliance on exports and increases social stability through political and judicial reforms targeted at opening up the political system and enhancing the rule of law, transparency and accountability. China also finds a new, more stable and cooperative modus vivendi in East Asia with both the United States and its Asian neighbours. The US–China relationship plays a critical role in securing this positive outcome for China.

Muddle through: This is a crisis-reaction rather than strategy-driven future, in which the leadership responds with limited effectiveness to environmental crises, a burst residential real estate bubble, corruption, increasing inequality and social discontent. China engages in reform by default more than by design. China takes tentative steps to enhance the rule of law, increase accountability of local and regional party officials, and gradually reforms the economic and financial system to enhance competitiveness, reduce the monopoly power of the SOEs, and, reluctantly and belatedly, moves to restructure the economy. This future is characterised by a reactive foreign policy that is a mix of nationalism, caution, and both cooperation and competition with the United States.

Middle-income trap: Pressures to sustain 7–8 per cent growth result in more-excessive and politically motivated lending by state banks to keep up the appearance of a growing economy, which in turn increases debt and continues unproductive investments. This proves to be counter-productive. The residential real estate bubble deflates, middle-class investors who put their savings into buying apartments are devastated, social unrest grows, and China’s real growth drops radically to the 2–3 per cent range as unemployment skyrockets. China falls into the middle-income trap, failing to move up the value chain in production to compete with advanced countries, while at the same time its higher wages make it uncompetitive with other developing countries. As China focuses increasingly on internal challenges to stability, it tends to view the outside world as a source of its problems and a strategic threat, thus stoking nationalism and increasing intransigence in its relations with other states and international fora.

One of the biggest obstacles to China realising a future close to a harmonious world is network of entrenched vested interests of the elite in state banks, state-owned enterprises, and PLA-affiliated interests arising as a result of its post-1979 reforms. There are, for example, reportedly 83 billionaires in the National People’s Congress. Given expected roadblocks to a new wave of reforms, China is likely to drift from muddle through toward the middle-income trap initially. Attaining sufficient political momentum to overcome resistance to implementing reforms may require bottom-up pressure (allowed by the politburo) caused by a triggering event such as the deflation of its residential real estate bubble whose fallout would be calamitous.

Robert A. Manning is a Senior Fellow at the Atlantic Council’s Brent Scowcroft Center for International Security and its Strategic Foresight Initiative. He served in the US State Department as a senior Advisor to the Assistant Secretary for East Asia and the Pacific (1989–93), on the Secretary’s Policy Planning staff (2004–08) and on the National Intelligence Council Strategic Futures Group (2008–12).

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Coming to terms with Asia’.

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