What makes China weak

It may look powerful, but the republic has troubles that make its future—and ours—uncertain
November 17, 2010
The central business district of Guangzhou flourishes, but future prosperity is not assured

It seems to many that the Chinese century has arrived. China has become the hub of a globally integrated manufacturing supply chain, the world’s biggest export and creditor nation, and the second biggest economic power in terms of GDP. In the coming decade, its growth could make its GDP larger than that of the US, and raise its income per head from $3,700 to around $13,000. Yet it is premature to conclude that China will soon be the top global superpower.

First, China’s development has reached the point where a new round of extensive economic, social, and most likely political reforms are needed to propel the country forward. (David Cameron timidly pointed to this during his recent visit.) Compared to the market reforms begun in 1978, after the death of Mao, these reforms may be more disruptive, more threatening to the Communist party’s dominance, and more challenging to the generally weak quality of China’s institutions.

Second, while China’s rise is widely admired, it is also viewed with suspicion—not only in the west, but also by India and other nations in Asia, who will try to place obstacles in China’s path.

One large obstacle is the global financial crisis. In rich nations, which still account for some three fifths of world output, an era of austerity is descending. The monetary value of their GDP may now only expand by around 3 per cent per year over the next decade, compared with twice that rate in the long boom before the crisis. This will constitute a big economic shock to China’s export economy. Like a bungee jump, production has bounced up again since the bottom of the 2009 crash—but this is merely a bounce after a long fall.

Moreover, if western debtor nations, including the US and Britain, are obliged to reduce private and public debt, the global system will only work smoothly if China, the world’s most prolific creditor, saves less. For now, China’s gross savings of 53 per cent of GDP drive its huge trade surplus, which is the focus of rising global tensions over its exchange rate and economic policies. These unresolved “global imbalances” lie not only at the heart of the financial crisis, but also behind the recent “currency wars” and the growing incidence of trade and capital account protectionism. According to the independent monitoring group, Global Trade Alert, the G20 nations that met in Seoul in mid-November account for most of the 400 trade restraint measures enacted over the last two years. China, Brazil and South Africa, among others, are suppressing their currencies and tightening or imposing controls on the inflow of foreign capital.

In short, then, China’s development model must change if it is going to continue prospering. Its leaders need to spread the economic advances from wealthier cities to the neglected countryside, from advanced coastal regions to the less-developed inland, and from manufacturing and industrial investment to consumer demand and service-producing industries. China will also have to shift income and wealth formation from companies to consumers by adopting a more flexible exchange rate, and allowing the development of market-determined interest rates. It will have to lift wages and extend social security and healthcare. And it will have to reform state-owned enterprises to allow them to divert profits back to households via the payment of dividends.

In the draft “Twelfth Five Year Plan,” due to be approved in spring 2011, China is starting to debate reforms along these lines, as well as proposals for land, energy and water price rises to combat environmental degradation and pollution. But it seems unlikely that there will be radical reform before the new leadership is installed in 2012. How China progresses will then be down to Hu Jintao’s successor, Xi Jinping, a hydraulic engineer by training and the recently nominated leader-in-waiting, who previously ran two coastal provinces, Fujian and Zhejiang. Xi, a relative unknown, is by no means as respected or experienced as most of his predecessors. To many China-watchers, he seems like a safe pair of hands—not a radical reformer.

The key issue, though, is not awareness of the need for change, but whether the Communist party has the will for it. It’s estimated that the country already experiences up to 100,000 incidents of unrest each year, in what sociologist Yu Jianrong calls “spontaneous venting incidents” over wages, social conditions, corruption and injustice. Transformational economic and political change will be even more disruptive and potentially unpopular.

At the same time, in the wider world, China’s assertiveness is starting to meet greater resistance. It has made loud calls for reform of global financial governance, the policies of institutions like the IMF and the role of the US dollar. It is building a new silk road, extending to the middle east and Africa, in which it trades political support, goods and know-how for access to critical natural resources. As the world’s largest emitter of carbon dioxide, China is key to climate change negotiations, and is also developing a leading position in low-carbon technologies.

It is not only the US that views this new China with mixed feelings, but also India and Japan, among others. The recent fishing boat incident between China and Japan, centring on the disputed Senkaku islands, prompted Japan’s foreign minister, Seiji Maehara, to wonder whether countries are now glimpsing “the essence of China.” His concerns won’t have been helped by the announcement in October of a Chinese embargo on the sale of the rare earth metals, which are used in modern technologies, and over which China has a near-monopoly. Nor were they helped by the expansion of China’s naval capacity, and the country’s relentless acquisition of stakes in global companies and resources, including this year in Canada’s oil sands, Australia’s largest methane gas company, Brazil’s oil and gas industry, and in Greece’s telecoms, real estate and shipping sectors.

Successful domestic reform will make China a less prickly player on the global stage. But this success is by no means assured; it will demand major legal, political and institutional changes. These befit a modern economy with a rising and economically-empowered middle class, but may prove a bridge too far for a still Confucian, if no longer Marxist, Communist party. If the party—which is riven by liberal and conservative factions—proves willing to cede control, then the party itself loses, but everyone else wins. If the party is not willing to change, a weakened and more nationalistic China will compromise its future and bring instability to the world.