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 Article written by Damian Grammaticas Damian Grammaticas China correspondent

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  • rate this

    Comment number 26.

    Typical comment from a committed at-all-costs-capatalist. Why would opening up their markets make their economic growth more stable?
    Are you seriously suggesting they have not had the most successfull controlled economy of all time?
    They seem to be doing quite well for themselves, our opened up economies have struggled severely recently and needed state money to stop a complete financial collapse. Are we really so confident in our current state that we are happy to tell China how the should do things?
    Typical western arrogance (note I am a westerner).

  • rate this

    Comment number 25.

    If the real question is whether China will become more westernized, I hope the answer is no. Western capitalism has failed - mainly because it has morphed slowly into a constant stream of interventions into supply and demand such that it is no longer real capitalism, but a hodge-podge of subsidies, Q.E., platform trading, derivative-lending, and...

  • rate this

    Comment number 24.

    I remember back in the late 90s the worries that China was going to snuff out Hong Kong's free market economy and what a waste it would all seem when there was nothing left. Seems the opposite was true and Hong Kong has taken over China with the same proportion of winners and losers. Unfortunately, the winning and losing in a country vastly larger is so much more magnified.
    A British colonial governor or a remote party apparatchik in Beijing means nothing as long as business isn't bothered by government so who cares about western style democracy or human rights when there's money to be made?

  • rate this

    Comment number 23.

    I notice that some comments below ignore the question, & just suggest more economic solutions. They miss the point, which is that the Chinese economy currently has to 'support' a vast 'communist' party who effectively make money via 'licences' & 'permits', which entrepreneurs have to pay in order to operate. In Russia its just plain called 'bribes'.

  • rate this

    Comment number 22.

    My opinion #2

    3. China's needs to continue their foreign trade policy development with South America and Africa. Africa can provide resources for China's development. It can also solved the problem with depressed exports to Europe and US. The surplus of products can be exported to countries in Africa and South America.

    4. The price of China's manufacturing and shipping cost is increasing compare to other countries such as Vietnam. China needs to support manufacturing operations to continue providing efficient operations that can meet deadline and unexpected requests.

  • rate this

    Comment number 21.

    My opinion #1

    China's economic growth depends on China's recently elected leaders and their policies and decisions toward all factors that can affect the Chinese economy.

    1. China needs to develop more technological advance products and develop better branding strategies to gain Global market share for their products.

    2.Over the past 10 years, China's growth in part is due to the increased lending on building projects: Roads, transportation, malls, apartments and office buildings. More regulations on lending need to be imposed to control a housing bubble.

  • rate this

    Comment number 20.

    China and its people are much better served by building infrastructure projects than half empty shopping malls and office towers. People in the vast but much poorer Western half of China are still under served by good roads, highways and rail system.

    Unfortunately, infrastructure projects are mainly funded by government money, while real estate developments are funded by private (and quasi-private) enterprises. That will not help China's continuous progress towards a true market economy.

  • rate this

    Comment number 19.

    To Comment #1 by Saewulf :

    Where do you get the 50% tax rate for poor people in China ? The 2011 revised individual tax rate is 3% for those making RM 1500 (~US$240) per month and 25% for those making RMB 9K-35K (~ US$ 1.5K-5.6K) per month, etc. The highest tax rate is 45% for monthly income over RMB 80K. The rates are even lower 20-30 years ago.

    Just Google "personal income tax in China" and get the FACTS.

  • rate this

    Comment number 18.

    Much of this sounds like Manchester UK though we haven't had a good riot since last year. I have two unbuilt sky scrapers within 500m and many empty sites, urban areas down the road with the highest rate of poverty in the country, low interest rates for save and two nationalized banks Firms own by private venture capitalists or foreign companies, alleged conspiracies to control energy prices, and two dominant leaders who have been at it since 1998 (Economist Nov 10/12)

  • rate this

    Comment number 17.

    To whoever wrote this:
    "Detractors would have them adopt our system of glowing success I suppose.Fact is,Millions of Chinese "Tourists" now spend Billions in Western Countries,and further Billions for their Children to Study abroad. Could things be better,Absolutely,but we could do worse than adopt some of what China has done to overtake us despite our best efforts to suppress. ..."

    Stop pretending like you are a foreigner... who ever made this comment
    is obviously Chinese! I can tell by the way you type! I live with Chinese people I know!

  • rate this

    Comment number 16.

    Boo to the boooring comments made here by oblivious Chinese, who have little or no understanding of the outside world. Sounds like propaganda victims are alive and well.
    And yes I live in China...

    And what is exactly is "China's own methodology??"

  • rate this

    Comment number 15.

    I completely agree with Mr. Grammaticas's words. It's all what I want to say and tried to talk about. Good job!

    The low income and pension, and the monopoly of the state own companies hurt the fundamental benefit of citizens.

    The construction of railway seems unreasonable, coz it can't elevate the living standard of normal Chinese. Why not use the money to support private constructor and improve the salary of employees.

    Only high income and pension can promise the undergoing economy surge. The economy increasement should be sustainable, this is, rising the capacity of consumption.

  • rate this

    Comment number 14.

    China does not have to westernize to keep growing/producing; in fact, I hope China does not. I hope it follows its own values. I hope it exerts every difference in can to the corruption, greed and other idolatries of the west.
    Yes, there is a need for change in China, but let these changes reflect China's own methodology. We do not need need another western super-power.

  • rate this

    Comment number 13.

    Our country has privatised most of its state enterprises, lowered taxes on private businesses and welcomed foreign investors. As a result the economy is in shambles and our children's future is bleak poverty, unless we switch over to Communism

    Yes and No to your comment. We need integration of both socialism and capitalism into the administration. This is what Singapore did and I believe China is considering this route.

  • rate this

    Comment number 12.

    Our country has privatised most of its state enterprises, lowered taxes on private businesses and welcomed foreign investors. As a result the economy is in shambles and our children's future is bleak poverty, unless we switch over to Communism.

  • rate this

    Comment number 11.

    As a result of the introduction of more market-led, capitalist ideas, urged on by the Interabtional Bank, WTO, and USA, I see that this has done what communism either could not or dared not do: it has begun to totally destroy the tradional good aspects of Chinese culture that underlay its civilisation and morality. So, internally, it is fatally injured. Externally, it is sufffering, because the likes of the USA just didn't want it to be better than they were at capitalist ideas, and they hate being in debt to China for many millions of dollars. So exterbnally, China is also fatally undermined.

  • rate this

    Comment number 10.

    As a middle class Chinese, my biggest concern would be house prices in the mega-cities of China, namely Beijing, Shanghai, Guangzhou etc., whether the government is able to curb the soaring property price will greatly affect my happiness. We have to pay the same price to purchase a flat as what we need to in London, but we make only half the salary here in Beijing!
    Morality of the general public is another issue but I guess this can be improved as time goes by and as the new generation have more opportunities to receive higher education than our parents and grand parents.

  • rate this

    Comment number 9.

    China is an extremely large country i.e. with a huge population. It has come a very long way in the past 30 years, despite/ because of strict regulation and control. The Government cannot afford rapid changes - they would be devastating. The west tends to think very short-term, which is unwise anyway, and it should not expect the same of China.

  • rate this

    Comment number 8.

    Detractors would have them adopt our system of glowing success I suppose.Fact is,Millions of Chinese "Tourists" now spend Billions in Western Countries,and further Billions for their Children to Study abroad. Could things be better,Absolutely,but we could do worse than adopt some of what China has done to overtake us despite our best efforts to suppress.Reality is,we still cannot solve How China/BRICS beat us at our own game,and until we do they will continue to outperform us Economically.Or,we can continue to Point & Gape in Frustration. East to South to South trade ring any bells?

  • rate this

    Comment number 7.

    In 1994, China was a friendly social place where people helped each other and worked hard. Today China is messed up ... they have gone through a Thacherite style of transformation - only magnified many times and done at a breakneck speed. People are greedy for easy money and care little of those around them. Displaying your wealth through shallow materialism is far more important than living a sustainable and meaningful life.
    The empty factories and tower blocks are just an extension of the falseness of China ... I wonder how long the mirage can be maintained.


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