China’s Stability and Growth Challenge

November 2012 saw not only the re-election of President Obama in America but also the changing of the top leadership in China. Mr. Xi Jinping will take over from Mr. Hu Jintao as President of China in March 2013 as Mr. Li Keqiang will replace Mr. Wen Jiaboa as Prime Minister. The term of the Chinese leadership is for 10 years. And what happens in China in the next decade will be of crucial importance, not only for China but also for rest of the world.

In the decade from 2002, China’s economy had quadrupled, overtaking Japan as the second largest economy in the world after the USA. In the same period, China has grown from the world’s fifth largest exporter to its biggest. The lot of the average Chinese has improved as some of the benefits of the prosperity are being shared. For example, 95% of all Chinese now have at least some degree of health cover, up from 15% in 2000; tuition fees in government schools have been abolished; and the government is making huge investment to provide 36 million affordable housing units by 2015.

During the Hu-Wen leadership, China also enjoyed growing global status. It has risen from a middle-ranking power to one that is increasingly seen as second only to America in its ability to shape the course of global affairs – from dealing with climate change to tackling financial crisis. Its influence is felt across the globe – from the poor countries in Africa to the rich countries in the EU dealing with the financial crisis.

It is against his background that in July 2013, the People’s Daily, the Communist Party’s main mouthpiece, calls the past decade a “glorious” one for China.

What lies ahead in the next decade?

China faces many challenges; and how well these challenges are addressed by the new Xi-Li team will determine how China will fare in the next decade.

Firstly, public sentiments do not echo the triumphalism of the People’s Daily. There is growing mistrust of the government and this is reflected in and fuelled by the rapid development of social media that have achieved extraordinary penetration into the lives of Chinese of all social strata, especially the middle class. Chinese micro-bloggers relentlessly expose injustices and attack official corruption, wrongdoing and high-handedness. Stemming this rising tide of cynicism will be one of the new leadership’s challenges. Dangerously for the country’s stability, it coincides with growing anxiety among intellectuals and the middle class generally about where the country is heading.

Secondly, China needs to maintain robust growth. Although the economic prosperity of the past decades has lifted hundreds of millions of Chinese out of poverty, there are over 100 million still below the official party line. To improve the lives of the poorest and move the country above the current GDP per capita income of US$6,000, China’s total GDP and per capita income should double by 2020, according to outgoing President Hu. This will require 7.5% average annual growth rate. According to independent experts and the IMF this should be achievable. But this has to be on condition that the Communist Party continues to enjoy the support of the people as it has done since economic reforms started under Mr. Deng Xiaoping.

Thirdly, China has to re-balance its economy and move to a new growth model – shifting from export-led growth to an economic model based more firmly on domestic consumption. This will necessitate income growth and lower household savings rate, and each presupposes key reforms. In addition, the Chinese government will have to attend to the linkages between the real economy and the expanding financial sector as it overhauls state-owned companies and liberalize the banks. It will also have to re-define the role of the state versus market, and address the growing inequalities and the unjust allocation of resources, which has enriched only certain segments of society. As the economic pie grows less rapidly, greater fairness will be crucial to social stability.

Lastly, a key question for the next decade, therefore, is whether the government’s growth targets will be enough to preserve social cohesion as further economic and political reforms are gradually implemented. It is a delicate balance to steer the economy in the right direction while implement new policies without triggering instability. The Chinese government has the skill, resources and track record of many decades of success. Whether they will be able to engineer the necessary institutional shifts in a more vocal, diverse and globalized society remains to be seen.