Saturday, May 18, 2013

The China dream



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.

Xi’s dream is different from his two predecessors.Xi’s dream is different from his two predecessors.

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.


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

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