The China dream

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

Tan Sri Lin See-Yan analyses the China Dream' and that President Xi Jinping needs to assure middle-class Chinese that the nation can remain rich and strong.
PRESIDENT Xi Jinping, general-secretary of the ruling Communist Party
as well as chairman of the Military Commission, talked of the “China
dream” to unite an increasingly diverse nation of 1.35 billion people.
What's Xi's vision which incidentally sounds somewhat like the American
dream?; even evokes Martin Luther King's “I have a dream,” reflecting
some US-style aspiration.
Since the revolution, China's goals
have centred on unity, strength and wealth. Mao Zedong tried to attain
them through Marxism and failed: the cultural revolution ended with his
death in 1976. Deng Xiaoping's catchphrase was more practical: “reform
and opening-up.” Then, Jiang Zemin pushed the more arcane “Three
represents” to embody the changed society, including allowing private
businessmen to join the party. Lately, Hu Jintao championed the
“scientific-development” outlook which was about being greener and
dealt with disharmony created by the divisive wealth gap. His Prime Minister Wen Jiabao
dwelt repeatedly with the need to rid the economy of the 4-UNs
unstable, unbalanced, uncoordinated and ultimately unsustainable growth.
Now,
Xi talks of his dream of “the great revival of the Chinese nation,” of
a “strong army dream,” and of our mission “to meet the people's desire
for a happy life.” He also alludes to ordinary citizens wanting “to own
a home, send a child to university and just have fun.” The Chinese
dream, he said “is an ideal. Communists should have a higher ideal, and
that is Communism.” Frankly, even though short on detail, Xi's dream is
different from his two predecessors' stodgy ideologies. I see practical
politics at work here. With growth slowing, Xi's new vision appears to
emphasise nationalism going beyond middle-class material comfort. Of
course, there is the usual tough talk on the rule of law and on
corruption (“fighting tigers and flies at the same time”); also on
meeting the public's wish for “better education and more stable jobs.”
His dream seems designed to inspire rather than inform. In the end,
“The China dream is the people's dream,” so he says.
Promises and pledges
China's
US$8.3 trillion economy went through its worst slowdown in 13 years in
2012 when weak exports and increases in interest rates dragged annual
growth to 7.8%, the grimmest since 1999. The economy faces more
headwinds as it struggles with surplus production capacity and
underlying risks in the financial system. So it's not surprising the
new administration has called for sweeping reforms and lessening state
control. Areas requiring pressing change include freeing interest
rates, promoting private investment, encouraging consumption and
“greener” growth, and enforcing the rule of law. It has even declared
“fair competition is our common goal,” vowing to end subsidising SOEs
(state owned enterprises) and levelling the playing field for private
enterprise.
The new leadership has since pledged to slash
bureaucracy, commit to market-oriented reforms, boost social spending
and services, and fight pollution. China is expected to rely on
migration to the cities to boost domestic consumption and re-make the
economy to be less dependent on massive outlays on fixed investment at
home and exports abroad. Such “rebalancing” needs to give markets room
to operate competitively. In finance, market forces will be given freer
play in setting interest and exchange rates, to ensure savers get a
better deal, and businesses have ready access to funding through more
effective capital markets.
The Xi administration now puts
China's fast growing consumer class at centre stage. Perhaps, the most
far reaching change thus far is the urbanisation policy being pursued.
This involves reforming the rigid urban hukou household
registration system by giving residency permits to some 220 million
migrants to the cities, and allowing farmers to sell land at market
prices to protect their land rights and boost incomes. Empowering a
whole new class of consumers underpins the national drive to reorganise
the entire economy from government to banks to SOEs. Such radical
overhaul is needed to seriously expand domestic demand. China's plan
includes adding 9 million new jobs in urban areas to keep unemployment
at or below 4.6% to ensure that real per capita income for both urban
and rural residents continue to increase. Its inflation target this
year remains at 3.5%, lower than 4% last year. China's actual inflation
last year came-in well below that at 2.6%. But these achievements came
at the cost of widening inequality and environmental degradation.
China's Gini coefficient a measure of income differences was 0.474 last
year, higher than the 0.4 level which signals a potential for social
unrest.
Transformation
China's GDP (gross domestic
product) rose 7.7% in the first quarter this year (down from 7.9% in
the fourth quarter 2012), slower than the median analysts' forecast of
8%. Given continuing weak US conditions and a eurozone locked in
recession, disappointing Chinese data cast a long shadow over the
global outlook. Frankly, I am not as worried provided it reflects the
transformation that's said to be already in train. Elements of this
reform include shift from investment-export led growth to a new
structure providing widespread support for domestic private
consumption. This rebalancing will involve new initiatives emanating
from services-led consumption, which in turn relies on more
labour-intensive services. These require 35% more jobs per unit of GDP
compared with manufacturing and construction (thus ensuring rising
employment and poverty reduction), with a much smaller resource and
carbon footprint.
As I understand it, this services-led
pro-consumption reform remains a core initiative in the current 12th
5-year Plan. The agenda needs complementary support from implementing
an enlarged and better designed social safety net; reform of SOEs; and
ending financial depression of households by raising the artificially
low interest rates on saving. But there are strong headwinds coming
from several directions: deteriorating credit quality affecting the
integrity of bank balance sheets; weakening export competitiveness
reflecting continuing rising wages; pollution, corruption and
inequality; and political economy missteps, including escalating
disputes with Japan and others. China has come through two major crises
in the past four years. Its economy remains robust and resilient but it
still needs to modernise. Make no mistake, the risks are real. Only
purposeful transformation can provide China with the needed strength
and resolve to pull through future crises. Reality check: as the
economy matures, its pace of growth will surely slacken.
Urbanisation
Urbanisation
(movement of rural population into cities and towns) has become a focus
of China's reform plans. Its urban population reached 690 million in
2011, against 170 million in 1978. The percentage of urban population
rose to more than 51% in 2011 (17.9% in 1978) and will touch 60% by
2020. Consequently, rural population fell from 82.1% in 1978 to 48.7%
in 2011. This movement highlights the strategy to rebalance the economy:
● It drives market demand; per capita consumption ratio of urban residents to rural is about 3.3:1;
●
Pushes investment in infrastructure and social housing which in turn
creates employment and new incomes, which further raises consumption. A
1-1.5 percentage point rise in urbanisation adds 15-20 million people
to the city;
● Promotes industrial restructuring and upgrading thereby raising the quality and productivity of employment;
● Increases jobs in the service industry. According to the World Bank,
emigrants send home US$45bil a year, with some sending as much as 80%
of their income to support their families. This leads to rising rural
spending on better homes, education, consumer durables and higher grade
groceries. Contrary to common belief, migrants actually maintain their
rural shopper habits as they work and sleep in urban environments. The
entire process will help to restructure the economy. It is projected
that 400 million people will become urban dwellers over the next
decade. Under the 12th 5-year plan (ending 2015), 36 million social
housing units will have to be built in addition to the 7.2 million
units built in 2012. To meet the growing demand for urban jobs, China
created 10.24 million new jobs in the first nine months of 2012
(exceeding the 9 million target set for the entire year).
But
urbanisation comes at a cost. It is accompanied by chronic
environmental degradation and worsening pollution, posing a serious
threat to human health and social stability. Urban migration is
drastically changing patterns of consumption and behaviour city
residents use three times more electricity than rural dwellers; consume
10 times as much sugar, and require vastly more infrastructure and
utilities to service their daily lives. Despite efforts to make cities
greener, progress is slow because local officials are rewarded for high
investment and fast growth, rather than for sustainability. Hence,
repeated calls for urbanisation to be “balanced with ecological
security.” Additionally, there is fear that the surge of migration
would turn cities into Latin-American style slums. But urban reformers
are pushing for “bigger-is-better” the idea that cities gain by having
people more tightly packed forcing greater use of public transportation
(hence, raising its effectiveness), forcing old-line high polluting
industries to relocate (thus raising productivity and freeing valuable
social space), forcing new energies into a city thus, helping to create
new businesses and investment.
Surprisingly, many of China's
biggest cities are much less densely populated than Singapore, Seoul,
Manhattan and downtown Tokyo, all of which have made strong, successful
transitions to the consumer-led service-industry model China wants.
Beijing (20 million) has a density of less than 5,000 per sq km and
Shanghai (18 million), less than 6,000 against 11,000 in Singapore,
18,500 in New York and 10,400 in Seoul. Rightly so, the Chinese
leadership is worried about building super-size urban centres because
they create slums, worsen pollution or spur pockets of political
dissent. What then, are we to do?
National unity
requires China to be one big bed. But its people can, and do have
different dreams indeed, as many as 1.35 billion. The challenge is to
get them all to dream the same dream. Xi hopes this would be his “China
dream.” China's rise in national strength is well known. It's already
the world's second largest economy and the world's largest exporter.
Over the past decade, the economy rose 9.3% on the average, raising per
capital income to over US$6,000 by 2012. Historians remind us that in
1820, China's GDP was one-third of the world. Then humiliation of the
century brought it down to a low so that by the 1960s China's share
fell to just 4%. Now, it has recovered to about one-sixth in
purchasing-power parity terms. Xi's dream needs to reassure the new
middle-class that China can remain “rich and strong” in the hope of
reigniting “the great revival of the Chinese nation.”
From the
“people first” approach to the “Scientific Outlook” on development, and
then to campaigning for a “harmonious society” and “inclusive growth”,
the Hu-Wen administration shifted the single-minded pursuit of GDP
growth towards more emphasis on balance, reorienting its strategies
towards a stronger focus on social security (by 2012, 480 million were
on pension and 1.3 billion covered by medical insurance); education
(reforms at decentralisation and addressing the need for innovation and
entrepreneurship); urban-rural divide (reform of subsidies and taxes,
and free and compulsory education in rural areas); and social housing
(leading to massive building). Despite much progress, these areas
remain of deep enough concern to require bold and innovative action by
China's new fifth generation leadership. As I see it, gradualism
(instead of cold turkey) is still the tone of future reforms. I see
this manifested by the new emphasis on introducing pilot programmes
first to test their workability on the ground when carrying out major
reforms.
As part of reform, it does appear now there won't be
any large-scale stimulus to boost growth as the government pares the
state's role and rely more on workings of the market mechanism and the
initiative of private enterprise. Many analysts have since begun to
lower China's 2013 growth to 7.6% for the year as a whole, as the road
ahead gets bumpy. It's unlikely to grow at 8.2% in 2014 (International
Monetary Fund forecast). For the Xi administration, speed isn't
everything. Better balance holds the key to unlocking China's dream.
● Former
banker, Dr Lin is a Harvard educated economist and a British Chartered
Scientist who speaks, writes and consults on economic and financial
issues. Feedback is most welcome; email: [You must be registered and logged in to see this link.].