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How China is changing and what it means for its economy

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Primary school students wear virtual reality (VR) headsets inside a classroom in Xiangxi Tujia and Miao Autonomous Prefecture, Hunan province, China, 14 March 2018 (Photo: Reuters/Stringer).

In Brief

For most Chinese, the Spring Festival of 2020 is one they’ll never forget. The holiday began as normal, with hundreds of millions travelling back to their hometowns to celebrate the lunar new year. But the country came to a standstill after 23 January, when the Chinese government locked down the city of Wuhan, the epicentre of a novel coronavirus outbreak, and implemented stringent travel restrictions and lockdowns across the country.


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COVID-19 has spotlighted the importance of China’s ascendance in global affairs like no other event. The response of China’s health system in the early days of the pandemic had international repercussions. China’s nationwide lockdown proved effective in containing the disease, in contrast with many Western democracies later on. China’s energetic ‘mask diplomacy’ created geopolitical waves that are only likely to grow in coming months as ‘vaccine diplomacy’ steps up in the developing world. China and the United States sparred over global governance at the World Health Organization.

The global catch cry is about China’s ‘change’ and its impact around the world. Chinese President Xi Jinping hails a ‘new era’ that will see China ‘become powerful’ and achieve ‘national rejuvenation’ within the framework of a ‘community of common destiny’.

In the latest issue of East Asia Forum Quarterly, edited by Neil Thomas and Jiao Wang, and launched today, Chinese and international experts explore how China is changing and the political, military, technological, environmental and strategic dimensions of that change.

Since assuming China’s political leadership in late 2012, Xi has strengthened the hold of the CCP over Chinese government and society. He’s modernised the army and the state like none of his predecessors. Xi is seen as the most powerful Chinese leader since Mao Zedong. Partly because of political propaganda in China, Xi is cast as the author of all things good thus framing him, especially abroad, as the author of most things bad.

Although not all that other countries worry about in their relations with China is in Xi’s control, his strengthening of the country’s authoritarian characteristics has made others more wary about engagement. Political antagonism towards China in the United States was given full vent under the Trump administration. Beijing can no longer assume a global political environment as conducive as it may have been in the past to China’s rise, and the country’s success appears to depend increasingly on the quality and the realisation of Xi’s domestic agenda.

Despite the US–China trade war and political pushback, Xi’s policies have delivered some progress. China’s ambitions to become a high-income country with a growth model ordered around consumption, innovation and sustainability are still on track despite the COVID-19 shock. But how might they be affected by the economic changes that China now confronts?

In our first lead article from EAFQ this week , David Dollar sees three structural challenges to sustainable Chinese economic growth in the years ahead. The first is China’s rapidly aging population. Relaxation of the country’s population control policies has not produced a baby boom. Robots and automation may help boost the productivity of China’s shrinking workforce, but Dollar sees that improved access to education, healthcare, and other social services are vital — especially in rural China.

Technology and innovation will be central to productivity-led growth and the threat of technology decoupling that China now faces makes domestic acquisition of technological capability a top priority. China’s innovation outputs are far less impressive, however, than its innovation inputs, as Dollar says, and industrial policy that focuses too much on picking winners is unlikely to succeed in boosting domestic innovation. If it is to realise the ‘China dream’, China needs to focus more on the foundations of innovation: intellectual property rights protection, venture capital, universities and general subsidies to R&D.

The deterioration of the international environment, which benefited China’s rise during an era of globalisation and global exchange, is the third major challenge. Fixing a badly fractured international economic system means there will have to be significant give and take between the United States and China — and that seems like a large ask, even with the advent of a new administration in the United States.

How is Beijing responding to these formidable challenges? In the second lead article this week, Yao Yang describes the key priorities set out in preparatory documents for the Chinese government’s 14th Five Year Plan (2021–2025).

Top of the list is technological independence. This priority is no surprise, given US moves to impose trade and technology exchange sanctions on major Chinese tech companies and research institutes. Other countries have been following the United States in pursuing policies that will limit trade, investment and exchanges with Chinese players in apex industries like semiconductors.

Also high on the list is China’s new approach to the urbanisation of its population, fairer provision of social welfare to reduce urban–rural disparities and greener production. As the COVID-19 crisis subsides, the next five years will be critical to China’s future. These four priorities are China’s first response to the changing economic and geopolitical landscape.

The 14th Five Year Plan is a continuation of existing policies to shift from external to internal drivers of sustainable growth. But vulnerability to technology decoupling is now a major problem and the new strategy of ‘dual circulation’ signals an acceleration of the strategic shift towards domestic circulation to achieve what is called a more ‘autonomous’ economy.

Technology decoupling imposes large costs on China but it also imposes large costs on US technology firms and on both societies. It can’t be taken for granted that China and the United States will become enemies and continue along the path of wholesale decoupling. Both countries have an interest in cooperation on international public goods such as climate change which, to succeed, will involve more trade as well as technology exchange.

What path is chosen — retreat to ‘autonomous’ development and insularity or remaking the rules and building confidence in multilateral re-engagement — will affect the trajectory of both Chinese and global growth and sustainability over many decades ahead.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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