What are the economic implications of the upcoming leadership transition?
China?s leadership transition that is taking place tomorrow at the 18th Party Congress is attracting as much attention as the US Presidential elections. Undoubtedly, both events will have much larger implications both domestically and internationally. Unless there is a bad surprise in store, the line-up at the apex body of the Communist Party of China will be the fifth-generation cohort (born in the 1950s) led by Xi Jinping (born 1953) and Li Keqiang (born 1955) as President and Premier, respectively. The likely administration of Xi-Li will formally announce and embark on the economic line in the Third Plenum of the Central Committee scheduled for next year?but not before it takes stock of outgoing President Hu Jintao-Premier Wen Jiabao?s economic legacy, which appears in ferocious dispute. Is China at a crossroads tethered by reform fatigue, changed global conditions and institutional decay?
In the last decade, China?s ?historical awakening? in line with Napoleon?s foresight has rung true. In Asia, as the ?first among equals?, China has surpassed Japan as the world?s second-largest economy and delivered an average annual GDP growth rate of 9.9% in the last decade. China began to occupy the global centre-stage with increased prominence at multilateral institutions. Unlike India, China was truly on a roll, ?China Shining?, what with its economic model feted and embraced by the developing world, with 61 Chinese companies on the global Fortune 500 list, with ?Made in China? goods displaying audacious visibility, and with China?s largesse by way of a magnanimous ?cheque-book diplomacy? creating bigger spheres of influence than Non-Alignment ever did.
China?s new leadership has cause to worry, not because author Gordon Chang?s prophecy is finally coming true (The Coming Collapse of China) but because of the worldwide collapse of optimism due to many factors?a dramatic change in global conditions (global economic crisis in 2008) and slower growth, which has adversely impacted China. China?s exports have sharply shrunk to Europe and the US, which recently (2012) resulted in a wave of small and medium enterprises? bankruptcies. The annual rate of growth in the third quarter was less upbeat at 7.4%, down from 7.6% in the previous three months, the slowest since 2009.
Factors conducive to China?s growth in the last decade are also sharply tapering down in several ways. First is China?s buoyancy due to its demographic dividend, i.e. ample cheap labour is coming to an end. Second is the fact that China is an ageing society with 178 million 60-plus people in 2011, which will dramatically increase to 221 million in 2015, an average increase of 8.6 million per year (16% of the population). Third is the dramatic increase in opportunities for higher education (total enrolment has increased sevenfold from 2.9 million in 1995 to 22.3 million in 2010).
Put together, there is shortage at the bottom end but a swelling pool of unemployed graduates in the middle.
On top of this, China?s retirement age is also low (55 years for women, 60 for men), lower than most countries in Asia. According to the World Bank document ?China 2030?, the dependency ratio is estimated to rise to 22% in 2030. Mortality has improved and this Supreme Courthas added to the pressures from an ageing population.
Separately, there is the niggling unbalanced sex ratio of 118.06 (118 boys for 100 girls) due to the ?one-child? policy, with possible social ramifications like a squeeze in the marriage market with an excess of 30 million surplus men, and a change in family structure and consumption patterns.
China is now neatly halved into rural and urban (50:50) but with one half going to two-thirds (urban) by 2030. Most cities in China are now ?concrete jungles? with clusters that the middle class cannot afford due to soaring real estate prices. Cities are also flush with migrants, a floating population which has increased more than six-fold from 40 million in 1990 to 260 million in 2012.
China?s economic prosperity of the last decade was largely the dividend of the President Jiang-Premiers Li Peng/Zhu Rongji (1989-2002) era, reminiscent and evocative of the Narasimha Rao-Manmohan Singh combine of 1991. Zhu Rongji, better known as China?s economic czar, received Jiang?s unconditional political support. Zhu relied on his ?baby?, the State Economic and Trade Commission (SETC), over the traditional State Planning Commission. The fulcrum of Zhu?s reforms was restructuring and streamlining the creaky state sector?the state-owned enterprises (SOEs) equivalent to India?s PSUs?in three years. This received formal endorsement in Jiang?s ?grasp the big (SOEs) and let go of the small?. Later, the spate of mergers and acquisitions of SOEs marked Zhu?s ?marrying the strong with the powerful?.
Despite assassination threats (and indeed attempts), Zhu proved that ?big fish could be fried?, what with heads rolling in SOEs and financial sector reform, bureaucratic hurdles leapfrogging, corruption kept at bay and key projects initiated such as in infrastructure and education. Zhu paved the way for WTO accession. Fruition of these measures came, though, during the last decade?the Hu-Wen era (2002-2012).
The Hu-Wen combine sought to write a new chapter in China?s reform by striving to address growing inequities, espousing ?development with a humane face? with ?harmonious society? and ?building a socialist countryside? as key policy formulations. The latter policy did away with the 2,600-year-old agricultural tax and increased subsidies to farmers. Subsequently, Hu?s ?scientific concept of development? was enshrined in the Party charter in 2007.
The restructuring of SETC in 2003 into State-owned Assets Supervision and Administration Commission and National Development and Reform Commission was also less than successful. China?s stimulus plan in 2009 ($600 billion) erred in projects that have sunk without a trace. Hu-Wen recently unveiled plans of $1.7 trillion in ?strategic industries? in the next five years. Most importantly, unlike Jiang?s support for his premier Zhu (like Rao for Singh), Wen did not receive the requisite political backing from Hu?which explains the backlog and the institutional stagnation.
Moreover, some of the ?policies? were not properly implemented?among them, rudimentary healthcare reforms, pledges of ?socialist countryside? and ?harmonious society??leading in part to the increasing discontent of the have-nots. Thus, China?s ?peaceful rise? has, in fact, become more of a ?rise? and less of ?peaceful?. The new leadership inherits a prickly crown, but with a chance to renew and re-balance, and bring in new energy and thinking to chart China?s onward journey.
The author, a Singapore-based sinologist, is currently a visiting fellow at the Institute of Chinese Studies, Delhi. Views are personal