UNSTOPPABLE YET UNSUSTAINABLE
By Richard McGregor
Friday, December 15, 2006
China has barely paused for breath this year in its jet-propelled rise into a global power, returning the country to a position its leaders and people think it rightfully occupies.
For the third year in succession, the economy is on track to grow by more than 10 per cent, according to Chinese statistics, a figure that many foreign investment bank economists think understates the true pace of development.
The leadership team of Hu Jintao, the president, and Wen Jiabao, the premier, has complemented the powerful economic re-emergence with a packed diplomatic schedule reflecting the new pressures, and interests, the country's growth has delivered it.
In a single week in November, it hosted 10 south-east Asian leaders in southern China, senior leaders from 48 African countries at a summit in Beijing and pulled together top envoys from six countries, including Japan and the US, to mediate North Korea's nuclear programme.
These separate events encapsulated China's paramount security interests, a need for stability in Asia, more raw materials – especially oil that Africa can provide – and good relations with the US.
At home, China has spawned a new caste of millionaires, an emerging middle-class centred in large cities on the coast, alongside a struggling and increasingly fractious rural underclass and urban poor.
The country has shown extraordinary resilience in the face of a wave of challenges since the late 1990s, successfully sailing through the Asian financial crisis, the bursting of the internet bubble and the recession in the US and its own home-grown health crisis, with the Sars virus in 2003.
Much underestimated, too, has been the stability that the relative maturity in the political system has provided. Mr Hu's peaceful takeover of all leadership positions from Jiang Zemin over two to three years from 2002 was the first such transfer of power in the history of the People's Republic, founded in 1949.
But for all of this, China's rapid development remains a curious mixture of the unstoppable and the unsustainable.
The unstoppable part of the equation is increasingly apparent to most close observers of the country. In the short to medium term, the rapid growth will in all likelihood continue, driven by a high investment rate, swelling exports and healthy local consumption.
The threat of a financial crisis has receded with the reform of the banking sector in recent years. And in any case, the $1,000bn-plus in foreign reserves means that the country has more than enough funds in its war chest should they be needed in any financial emergency.
The sheer drive and ambition of the Chinese people is the X-factor often left out of the economic equation.
For all the injustice and unfairness meted out by the Chinese system, the huge advances made by so many individuals in the past quarter of a century make for a compelling narrative, and one that increasing numbers of people elsewhere want to sustain or emulate.
The pace of economic growth might ease slightly next year, to about 9.5 per cent or so, but that is the kind of slowdown that China could manage with ease, and might even welcome.
But even by the leadership's own reckoning, the country's present development model is unsustainable. The rich-poor gap has grown so quickly in recent years that the country is now more unequal than the US and Russia, an astounding development, given that two decades ago the country was one of the most equal – even if that did mean poor.
China's growth has continued to bring down the poverty rate, from 16 to 10 per cent in the three years from 2001, according to the World Bank's measure of $1 a day in consumption using global prices.
But at the same time, the poverty dynamic has changed in a way that worries the leadership.
In the two years from 2001, according to a World Bank study, the income of the poorest 10 per cent of Chinese actually fell by about 2.5 per cent, despite rapid economic growth.
More than half of these new poor do not live in villages and about 70 per cent of them had suffered an “income shock”, as a result of health problems, crop loss or injury.
“This suggests that further poverty reduction in China will require measures that reach households with different types of safety nets or insurance, for example health insurance, crop insurance – but also welfare programmes recognising that some households have no adult who can work,” says David Dollar, the World Bank's country head for China.
Messrs Hu and Wen have made tackling the rich-poor gap a priority of their economic programme, but the imbalances, and corruption, in the political system, make it difficult to proceed quickly on the issue.
The central government's ambitions for a huge increase in outlays on health and education, the public provision of which has diminished as the economy has soared in the past decade, have been stymied by Beijing's deep distrust of the provincial and city leaders who will be responsible for delivering such services.
They worry that local leaders will spend the money inefficiently, or in some cases, divert funds into their own pockets.
At the same time, local leaders complain, with some justification, that Beijing has forced more and more service provision on to them, while simultaneously starving their administrations of funds and taxing powers.
The other big issue, the impact of which is more difficult to calibrate, is environmental degradation. The government has vowed to address this issue by forcing higher environmental standards and more efficient use of energy.
But once again, its ability to do anything quickly to ameliorate the pollution choking the cities and stem the alienation of valuable farmland and scarce water resources is limited in the short term.
In part, this is a product of China's success. The desire for development means that governments at both a central and local level are reluctant to rein in economic growth.
Economic growth also confers legitimacy on the government. But the administration's limited mandate outside Beijing also makes it difficult to enforce its own environmental rules anyway.
China's economic structure faces global risks as well. The country's current account surplus has swollen to about 8 per cent of gross domestic product and shows little sign of slowing. A sharp downturn in the US or Europe would fuel protectionist sentiment in both places, and in all likelihood spur a wave of anti-dumping cases.
All these issues are to a large extent openly and vigorously debated in China. But whether the political model, of single-party communist rule, is unsustainable is another, related issue that cannot be discussed openly.
Mr Hu is expected to be confirmed for a second term at next year's once-every-five-years party congress and he will also usher in a younger team to succeed him after 2012.
Does such a system have the flexibility to manage the country's myriad challenges, both of a prosperous and increasingly demanding urban middle class, and a large, poor and often disenfranchised farming community?
Amid China's uneven, 21st century boom, that remains an open and, for the moment, unanswerable question
