Will China reform to secure its economy?

The Chinese flag is reflected on a fashion poster at a shopping mall in Beijing, China, 12 November 2012 China still has a long way in spreading its wealth more evenly among citizens

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As China's Communist Party meets to elevate its new generation of leaders, there's a widespread feeling in Beijing that the past decade, for all the economic success it brought, has been a missed opportunity.

The outgoing leadership has focussed its efforts on growing China's economy. The incoming leadership, many believe, must now focus on important reforms if they're to secure China's economic future.

So one of the major questions facing the next generation is how urgent they believe the need for change really is, and whether they will have the clout to push through reforms.

One view of China today is as a place of soaring superlatives, its economic achievements as impressive as the skyscrapers that now cluster in every major city.

A man walks past a big suit at a shopping mall in Shenyang, Liaoning province 28 October 2012 China is now the world's second biggest economy

Thirty years ago, China was one of the poorest countries on the planet. Today it's the world's second biggest economy, its biggest manufacturer, its biggest exporter, its biggest car market, with the biggest foreign exchange reserves of any nation.

To any visitor, China certainly looks impressive - its giant cities, bisected by multi-lane freeways, jammed with expensive foreign cars, its streets lined with global brand names.

The economy is expected to expand by over 7% this year, and the government believes will continue at that pace for several more years to come. So surely China's leaders should be happy, and stick with what's been a successful formula?

But they're not. All the talk in Beijing is of how things must be reformed - urgently - if they're to be sure of another decade of impressive growth.

Idle hands

For all its success, China today is a place where average incomes are still little more than those in Jamaica. It has a long way to go, raising incomes further and spreading wealth more evenly among its people.

China's export industries, for so long a mainstay of the economy, are not contributing to growth the way they used to. Visit the vast manufacturing areas along the coast and in many of the giant factories that churn out China's exports machines stand idle. Consumers in Europe and America just aren't buying.

A worker at a bus manufacturer in Dandong City, Liaoning province, 20 October 2012 Wages for factory workers in China are now five times higher than in Vietnam

As one factory boss said to me last month, wages for factory workers in China are now five times higher than in Vietnam, so he's moved all his labour-intensive work out of China. Many others have done the same.

Look a little closer at some of those skyscrapers, and not much work is happening on the building sites. China's leaders have been trying to cool property prices after they spiked upwards and construction, another major part of the economy, slowed sharply recently.

Instead, the government is still pumping money into networks of motorways and high-speed railways. Many are now being built through far-off, poorer regions. At some point, China will find that building more and more infrastructure has its limits.

Visit China's huge, new shopping malls and you find quite a lot of shops are empty, collecting dust. For all the wealth that's been created, spending by China's own citizens accounts for just a third of the economy - that's half the level of Western nations.

Consumer spending is growing at over 10% a year, but needs to keep growing faster than the rest of the economy if it's to become a bigger part of China's economic mix.

That's important because it will make China less dependent on exporting to other countries, and less reliant on those giant government projects.

Free reign?

Meanwhile, all the commanding heights of the economy are controlled by the Communist Party-led state. Giant state-owned banks, telecoms companies and electricity firms and many more enjoy massive and lucrative monopolies.

A neighbourhood in Shanghai, China, 12 November 2012 Can Chinese leaders reform banking so ordinary people can invest?

They suck-up wealth and capital which would otherwise go to more dynamic, private businesses.

So will China's incoming Communist leaders break up the huge state-owned enterprises? Will they reform China's financial system so loans flow to businesses that are most likely to make money, not just those with political clout?

Will they free up the banks so ordinary people have more places where they can invest their money and can earn a decent return on their savings?

Will they expand the current low level of pensions and health insurance so people enjoy genuine security and are inclined to spend more? Will they open up to increased foreign competition?

Will they, in short, limit the role of the state?

The trouble is that the Communist Party itself, and many of its most powerful figures and their families, profit personally from the wealth and privileges that flow from controlling so much of the economy.

Relaxing the party's grip may make economic growth more sustainable, but may also be resisted by some of the party's most important vested interests.

The talk is all about how urgent reforms are. The test of the new leadership will be whether they have the clout to push reforms through, or whether they will be hobbled by the party they lead.

Damian Grammaticas, China correspondent Article written by Damian Grammaticas Damian Grammaticas China correspondent

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  • rate this

    Comment number 6.

    China is unique in that it has a one party system which seems to be working. China's leadership will probably not open up and let the average Chinese person invest as they can in the west. China is still an export machine. Without exports their economic system would surely fail. With this said the communist leadership realizes that domestic consumption along with maintaining a steady market society will have to grow. China can't truly see the end of their economic miracle until they can get the populous on board buying consumer goods. . This is China's most profound issue.

  • rate this

    Comment number 5.

    As mentioned Giant state-owned banks, telecoms companies and electricity firms and many more enjoy massive and lucrative monopolies.The members of the Communist party most powerful figures and their families, profit personally from the wealth and privileges that flow from controlling so much of the economy.Therefore reform will happen if things change here and economy slowing will change them

  • rate this

    Comment number 4.

    The leadership in China knows that they need to keep the populous happy, and to do that they need to provide steady economic growth. Even a slight decline in economic growth scares the leadership. China is beginning to feel the pressure they once put on others. Now some of the corporations and manufacturers are moving out of China due to higher wages in China. China will have to rein in more friends if they want to be secure. Money has its limits, and China knows that there are few nation who truly trust them due primarily to their growth, the South China Sea dispute, & military expanation

  • rate this

    Comment number 3.

    They need to grow up and stop acting like a bunch of thugs if they want to be taken seriously, we all know that the riots aimed at Japanese owned businesses and the protests outside the Embassy were organised by the governments rent a mob, of off duty soldiers and police.
    The closing down of Norwegian salmon imports becourse of the awarding of a Nobel prize to a Chinese disident was another example of their childish behaviour.
    They cannot run to the WTO when they feel agrieved about solar panal exports when at the same time they openly copy western car designs and sell them domesticly

  • rate this

    Comment number 2.

    The biggest challenge facing China is moral crisis. No matter how good a policy seems to be, it won't work out with collapsing moral.

  • rate this

    Comment number 1.

    The underlying problem in China is still corruption. My Chinese friend was raised in abject poverty at a tax rate of 50%. When he was young, he said, the Party was popular and Chinese people felt like they were doing their bit by paying those taxes. But the government doesn't do enough to give it back.
    Modern China is a small, wealthy elite and a horde of unhappy peasants. Things are changing, though. People don't like their hard-earned yuan going to line the pockets of corrupt and greedy officials. The government must reform or die.


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