Snakebit? How the New Chinese Leadership Can Move Forward

By: Brian Liu

Despite China’s recent economic success, social and economic problems lie just beyond the horizon. These issues include an unsustainable economic model, a failed One-Child policy, and political corruption.  The burden of these problems now falls into the lap of Xi Jinping, China’s newly selected leader of the executive politburo committee. In order to remedy such problems, the Chinese government must make a series of political and economic reforms that strive toward a more liberal private market, as well as a more transparent and accountable government.

China’s economy has expanded at a blistering rate in recent years.  In 2007, China’s GDP grew at a rate of 14.3%. Millions of people have been pushed out of poverty and into a vastly growing middle class.  The standard of living as well as the standard of education has increased. Much of this rapid expansion was the result of a massive stimulus injected into the economy by the Chinese government that targeted housing and infrastructure. Such spectacular economic growth, however, is not all that it seems. A lot of this GDP growth is investment based and not consumption led growth.  These investments were mostly in housing and infrastructure. They, in fact, took up more than 48% of China’s GDP in 2011 and, more alarmingly, a disproportionate amount of this investment was done by state-controlled firms. This is troubling because it shows that it is not households, but rather the government that is bolstering GDP.  China’s economic model relies too heavily on the government and not enough on the private market.  The problem with such reliance is twofold.  The first is that it reduces GDP growth in the long run by restricting the creativity and innovation that is inherent in a more open market.  The second is that such unbalanced economic growth isn’t sustainable.

Another crisis may result from China’s One-Child policy.  This policy puts tremendous stress on China’s entitlement programs.  Because of severe reductions in population size, China’s working population is significantly smaller than its retiring one, placing tremendous financial stress on the current working class.  Furthermore, this reduction in the labor force as well as the effects of the stimulus package wearing off has reduced China’s GDP growth rate.  GDP fell from 11.9% to 8.9% in 2011, and many economists believe that it will continue to fall in the future.  This slowdown in economic activity as well as the growing debt from entitlement programs will put the Chinese government in a difficult position, especially as much of China’s GDP growth is based on the government’s investments. Already, China is facing social unrest because of a slowdown in GDP growth in recent quarters. The previous summer, for instance, in the city of Chongqing, thousands of protesters clashed with police in a violent riot, over the slowdown of the economy. Daniel Rosen, an economist and head of the Rhodium Group posits that China is at a juncture.  He argues that “If the [new leadership] doesn’t move quickly, the consequences will be clear and immediate.”

Moreover, the Chinese government faces a large problem with corruption, emphasized by Bo Xilal’s corruption scandal last summer, in which Mr. Bo funneled more than a billion dollars into offshore accounts. His wife, in order to cover up this corruption, had their British accountant murdered. While this may seem like an isolated event, corruption in China is more pervasive and more harmful than one would like to think.  Economists Zeng Zhonglu and David Forrest calculated that the average corrupt official or senior manager in a state-owned company took $3.3 million before getting caught.  Furthermore, the People’s Bank of China found, in recent years, that 18,000 officials have fled China with at least $120 billion in total stolen assets.  As John Osnos, the Chinese correspondent for The New Yorker concluded, “There is a difference between knowing [corruption] exists in the abstract and confronting the cold, blunt accounting—seeing the cars and tuition it buys, realizing the land that was seized to pay for it, and working out how those funds might have been used for better health care or education.”

Xi Jinping, in order to mitigate these problems, must make a series of reforms.  Economically, he must target a more liberal private market.  Free enterprise will contribute to China’s growth or, at the very least, alleviate the effects from a slowdown in GDP.  This is important because, as of now, the Chinese economic model isn’t sustainable.  The Chinese government can do this by breaking up some of the large state-owned companies to allow for more competition and economic activity.  By doing so, the government can transition from a more investment based economy to a consumer based one.  Furthermore, breaking up large state owned companies would take the burden of investments away from the government and to the private market.  Such a reform might lower China’s GDP in the short run, as it will take time for consumer based spending to pick up, but in the long run, it will put China on a more solvent economic path.

In light of the problems caused by the One-Child policy, China must reform its entitlement programs for the elderly.  The Chinese government should consider switching to a voucher based system.  This would lessen the pressure on China’s government as well as the working population.  They would need to be careful on how the voucher-based system is structured.  The government could implement a progressive model that determines how much someone contributes to his or her pension, with the wealthy paying the full amount and the very poor not having to pay at all.

Politically, the Chinese government must crack down on corruption. The government should strive for greater transparency, which would allow for more accountability as well as an environment less conducive to corruption.  The best way to deal with corruption is to instill a sense of purpose in government officials.  In China, political advancement is not so much based on competence, as it is dogma.  Those with connections advance over those with skill.  This creates a mismatch between doing good work and being rewarded. If China were to correct for this imbalance, it would create incentives for officials to care more about their work and more about doing a good job.  Such incentives would also instill a sense of purpose and more importantly a sense of care into government officials, which would significantly reduce corruption.

China faces large, growing problems, which include an unsustainable economic model, a failed One-Child policy, and political corruption.  Yet as large as these problems are, reforms to address them may have to be larger still.  But, the Chinese, like everyone else, simply want happiness and prosperity. They see the problems in the economy.  They see the unjust corruption in the government, and they are already asking for change.  Reforms, then, seem neither too large nor too troublesome. They have become necessary.

Photo credit: Flickr user CEPAL ONU

This article originally appeared in the winter edition of PPR on March 11, 2013.

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