China emerged as a regional power after Mao Zedong emerged victorious in 1949. The new China moved forward with the help of its socialist system. The continuous progress of China on the world stage has since been watched with great admiration.
Mao’s successor, Deng Xiaoping and the subsequent leadership after 1978 shifted their focus towards a more market oriented economic development process. This released the creative energy of the Chinese people and by the year 2000 their national output had quadrupled. Since then, for much of its population, living standards have improved dramatically. The room for personal choice has also expanded because of advances in information technology. This synergy has since found expression in the phrase ‘Chinese Dream’. It has enhanced China’s global outreach and participation in international organizations.
Internal reforms have also contributed to China achieving its major economic status. They include phasing out of collectivized agriculture, gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of the stock market paradigm, rapid growth of the private sector and opening up to foreign trade and investment. All these measures have enabled China (on a PPP basis that adjusts for price differences) to become the second largest economy in the world after the United States, having overtaken Japan. China is also second to the USA in the value of services it produces.
This rapid economic expansion has however also resulted in unwanted challenges- deterioration in the environment, notably air pollution, soil erosion and the steady fall of the water table, especially in the northern regions of the country. These factors have combined to create uncertain conditions which have led to loss of critically important arable land because of erosion and rapid economic development. China, because of manufacturing necessity has also ended up being the largest importer of fossil fuel- oil, coal and natural gas. These adverse consequences have now persuaded the Chinese authorities to seek additional energy production capacity from sources other than fossil fuel, focusing more on nuclear and alternative energy development by using renewable energy.
The Chinese measures are principally directed towards reducing loss and diverting savings to more productive areas. Effort is also being made to ensure that anticipated reforms do not suffer because of bureaucratic tangles. The Chinese President has made it clear that the government aims to cut, reduce and simplify the process of review and approval of investment projects to minimize the possibility of inconvenience and high costs involved when enterprises and individuals try to obtain the required services necessary for their entrepreneurial efforts. Another important feature has been the decision to decentralize effectively and to increase funding for local government units.
Efforts are also underway to create the necessary administrative structure that will deal with the fallout of any social instability that may arise because of the exercise. The Chinese leadership believes that if their plan can be successfully implemented, it will also help the 300 million migrant workers who are struggling to integrate into urban China and will stop the widening of the gap between the rich and the poor.
It is generally agreed that by 2023, China will be nearing the U.S. as the world's number one economy. This is believed to be inevitable despite the prospect of its hyper-fast growth rate over the last 10 years not being replicated in the near future and China moving from an export and investment led economy to one based on domestic consumer-based growth.
It may be recalled here that massive investment and exports in the past decade has helped China’s economy grow an astounding six times -- from $1.5 trillion in 2002 to over $9.1 trillion this year- which has transformed this sixth largest economy to the second position in the world.
A government think tank has also recently predicted that in seven years 600 million Chinese will be part of its swelling middle class. More than half of the country's workers now reside in urban areas, as rural migrants move to cities for better employment opportunities. These are impressive indicators.
There is however also the growing specter of inequality and a growing income divide. A recent study carried out by Southwestern University of Finance and Economics in China has observed that China's top 10% of households surveyed have 57% of the country's total income and 85% of total assets. The new Chinese leadership knows that they have to address this social issue carefully and initiate required pragmatic reforms. Some believe that this might be a thornier proposition than simply building the new roads, airports and other infrastructure projects that have helped propel the Chinese economy.
An effective approach to reduce this growing inequality will most certainly require, according to Professor Gan Li ‘the shifting of government spending priorities away from massive infrastructure development to social welfare investment’.
He correctly believes that this will help to create a stronger social safety net and ‘the Chinese workers will feel less pressure to save for health emergencies, unemployment and retirement’, and in that case, will be ‘more likely to buy goods and services’.
One thing is clear. China is today at the cross roads. However, in this context, contrary to the views of some, I do not believe that because of this transition, China is in the same position as was Russia, Hungary, Poland or Czechoslovakia 23 years ago. Yes, there is the division between an ageing Party and the young intellectuals, as was the case in Moscow and Leningrad at that time, but the difference today, is that, there is more inclusiveness and inter-action across the divide in China. The younger generation like others in the developed world, also believe in freedom of speech and freedom of publication. This has persuaded Chinese artist and dissident Ai Weiwei to state that "I think China will change. It is inevitable".
Today, China's leaders want a more modern economy, shifting further away from a centrally planned system. In this context, major issues that are on the agenda include financial liberalization and reform of state-owned enterprises. Household registration reform (hukou) and land reform have also been flagged up - but costs and vested interests, according to analysts, have made these issues tough to tackle.
One significant problem that the Chinese leadership have targeted and tried to find a compromise formula is regarding China's cumbersome state-owned banks that pose a huge bottleneck in its economic growth. Zhu Guozhong, professor at Peking University's Guanghua School of Management has explained the problem in this way- "State-owned banks are more interested in lending to state-owned enterprises because this is politically safer. Leaders of state-owned banks are more interested in political promotions rather than profitability of the bank." He has gone on to observe that ‘this leads to a very low efficiency in the allocation of funds. More funds go to less efficient state-owned enterprises’. This happens despite China having ‘very active, very creative private firms. They need finance but they don't get it’.
Others believe that government monopolies in sectors like oil and telecommunications are the real issue. Sheng Hong, Director of the Unirule Institute of Economics, a private think tank based in Beijing has explained this by stating that "State-owned companies, especially industrial state-owned companies, are generally in debt. This is unfair because they take up a lot of state resources, such as land and loans. They haven't made profits in about two decades, but those officials receive unlimited salaries and bonuses. Chinese people hand resources to this group of people but they don't reward the people at all."
Consequently it is clear that Xi Jinping will have to negotiate between competing interests if he hopes to engineer ambitious reforms to the country's state-owned assets. All issues need to be put together, co-ordinated and a consensus reached towards implementation."
Most recently, China has started taking steps to push for a fresh round of state owned enterprise (SOE) privatizations. This important measure will however require not only improving competitiveness but also tackling a perceived culture of waste and corruption that characterize, according to some US economists, many of China’s central SOEs in sectors such as finance, energy and telecommunications.
In this context, one however needs to refer to recent steps taken by Chinese authorities to actively take a hard line against bribery and corruption. Since 6 February, 2013, the Provisions of the Supreme People’s Procuratorate on Bribery Case File Inquiries have become effective. This has improved China’s file-inquiry system within the paradigm of identifying bribery and its compliance with accepted anticorruption laws. This is also facilitating investigation and enforcement action.
The depth and breadth of financial reforms that are expected to accrue from the interest being taken by Chinese politicians will take time. Nevertheless, in the short and medium terms, the future path to be taken by the world's second largest economy will be closely watched. It will also have implications for economic stability for the rest of the world- both among developing nations and also its largest economies.
It would be pertinent for all of us to understand that despite current challenges, the leadership in China will continue to push for economic development. Within this matrix efforts will also be made to implement certain initiatives consistent with Chinese assertions that desire “to complete the building of a moderately prosperous society”. In this regard China will be hoping to double its 2010 GDP and per capita income for both urban and rural
residents by 2020. China knows that its position on the world economic stage will increase significantly if this scan be achieved.
With the expansion of the economy, it will seek to make more investment abroad, consistent with the new leadership’s motto of pursuing the “going global” strategy with vigor. This effort will be welcomed by other industrial States as a more prosperous China will also mean a higher demand for their products.
To this will also be added the economic fall out of the surge of Chinese tourists visiting destinations in Europe and elsewhere. This is expected to particularly help EU’s economic recovery from their current Euro crisis.
Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance