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“I have a dream, the China Dream”

“I have a dream, the China Dream”

27.03.2013 7:58

In a period of 12 hours last week, two of the world’s most powerful institutions installed new supreme leaders. They have in common that they were both chosen in total secrecy. I am talking about the Roman Catholic Church and the Chinese government. But while the choice of Pope Francis I may have surprised many, the appointment of Xi Jinping as China’s new president was decided more than five years ago when he was appointed to the Communist Party’s Standing Committee as the highest-ranked member who would not be of retirement age in 2013. The presidency is a largely ceremonial office in China. Mr Xi was appointed to the two most important leadership roles, namely general secretary of the Communist Party and chairman of the Central Military Commission, already in November 2012.

Mr Xi is what they call a "princeling" in China. He is the son of one of the men who led China's communist revolution, communist veteran general Xi Zhongxun, who served with Chairman Mao. Xi Jinping is now the no. 1 man in the People's Republic's fifth generation of leadership. The first generation was obviously led by the omnipotent Mao Zedong, whom millions of Chinese will forever credit with the infamous Great Leap Forward and the Great Cultural Revolution. The death of Mao and his lieutenants Zhou and Zhu in 1976, and soon afterwards the state coup that resulted in the arrest of the Gang of Four, ushered in the new era in China, an era now identified with the "second generation" of leadership of reformer Deng Xiaoping. The handover to the third generation happened in 1989 when, in the aftermath of the Tiananmen Square protests of 1989, Deng nominated Jiang Zemin as his heir apparent. The fourth generation of leaders, technocrats led by Hu Jintao, came to power in 2002 and was the first orderly transition in accordance with rules on term limits. Supporters of the Chinese system argue that the party, unlike most authoritarian regimes or indeed the Catholic Church, has managed to introduce a system of true collective leadership combined with term limits and forced retirement for top leaders. Although there is nothing in China’s national or party constitution regarding term limits, Mr Xi is expected to emulate his predecessor Mr Hu and serve two five-year terms before handing on to a new generation of leaders.

Political and economic commentators in the West have been trying to read the tea leaves for any signs of change in direction by President Xi. As usual, they started by dissecting his political career to-date. They went on analyzing the unusually prominent role his popular folk singer wife Peng Liyuan is likely to adopt, the fact he likes foreign movies like Saving Private Ryan, and that his only daughter studies at Harvard (all alleged signs of his Western leanings). They analyzed the places he went on his first public trips as a General Secretary (to the "Special Economic Zone" of Shenzhen in the south, to demonstrate his support for the economic reforms, to the very poor villages in Hebei mountains where he was filmed meeting peasants, to show he was a man of the people, and to high-profile military units, to underscore the importance he attributes to the army and his dream to make China a major military power). A lot of press was devoted to analyzing the food he eats at official banquets (only four courses and a soup as opposed to the lavish spending of other officials), the exact words Mr Xi said at the party conference and in “private” speeches to the party members. Since China became the 2nd largest world economy in 2010, officially beating Japan to the place, the analysis of all this has taken on a life of its own.

So shall we expect any reforms because Mr Xi likes American movies? China's new President says he is a man with a dream, which he calls "the China Dream". His ambition is “to lead a Chinese renaissance so China can resume its rightful place in the world”. According to some Chinese mainland observers, Xi Jinping knows exactly what he will do next.

Almost every economy in the world is currently fighting its own demons. The problems of the Old Continent are well known, the latest crisis (Cyprus this time, but we have many more countries to go) is just making the headlines. The US are dancing a bad data / good data dance with macroeconomic figures, consumer optimism, stock market performance, strength of the dollar, etc. but due to the fragile recovery are not doing anything to address fundamental long term imbalances between budget revenues and costs. Emerging markets each have their own set of worries: over-dependence on natural resources, indebtedness, aging population, over-regulated markets, insufficient infrastructure, inflation. China is still seen by most as the healthiest and most promising of the BRIC countries but a long to-do-list exists for the new China's new leadership and only time will tell whether and how they will tackle the issues on it.

Experts point out, e.g. that the new leaders have to find a careful balance between sustaining the growth at the target ca. 7.5 percent rate while controlling the property bubble and speculative investment. Any slowdown would jeopardize urban jobs, thus instantly creating explosive discontent. Any faster, and speculative investment and inflation spiral. The example of end-2008 is a point in case. Back then, the sharply declining global demand for Chinese products led to a loss of an estimated 20 million of jobs. Beijing, fearing consequences, hastily pumped in 4 trillion yuan ($640bn) which immediately fuelled real estate price rises and an infrastructure-focused borrowing binge by local governments. The inflation is still biting and the urban dwellers are very angry at the spiraling real estate prices.

China also suffers from one of the world's widest rich-poor gaps. It has opened up with the introduction of economic reforms where the government officials have grown wealthy beyond measure, disproportionately benefitting from the ensuing growth. The reform of the household registration system, or Hukou, rules is particularly pressing and ought to both address inequality and boost domestic demand. About 158 million workers have to-date migrated to the cities from the 250 million-strong rural workforce but cannot formally register their residence there and are therefore denied access to health and education services. This is forcing them to save too hard and limiting much needed domestic consumption.

Actually, the world’s last remaining major communist country is not even pretending to be socialist. Education is free only until 15, then the families must pay. A health care reform seeking to provide more equitable care to the poor was launched only as late as in 2010. Health care was neglected when Deng Xiaoping launched pro-market reforms in the early 1980s. At that time, the government took apart the original communist model, where work places or agricultural communes covered most health care for households, and shifted costs onto consumers and hospitals. The health care system pays on average approx. 70% of your bill in a local hospital but only 30% of an expensive treatment in a specialist unit. In 2007, the World Health Organization ranked China's health system as 144th in terms of quality and access, out of 190 countries, below far poorer countries like Haiti.

China must make its formidable growth more sustainable and less damaging to the environment. Pollution in urban conglomerates like Shanghai is dreadful. The government should also encourage refocusing the current export-oriented growth model into a more balanced model by stimulating sustainable domestic consumption and developing service industry. Exports are worth around 30 percent of China's GDP and an estimated 200 million Chinese jobs but over-dependence on exports of low value-added produce makes the country vulnerable to external shocks. So the government ought to push its manufacturers and exporters up the value chain to technologically more advanced, higher margin products (never mind that it causes tension with foreign trading partners accusing their Chinese assembly plants of stealing designs and copyrights of products). Other reforms may be a bit more difficult to implement, such as a reform promoting foreign direct investment by Chinese firms, which is required to address a capital flow imbalance. Or improving regulation in domestic stock markets which could steer speculative capital away from the problem areas of real estate and shadow banking. The shadow banking sector comprises of wealth management gathering deposits for lending outside formal banking channels and is estimated to be worth at least $1 trillion and growing nearly three times faster than traditional lending. Shadow banking is a major source of capital for speculative real estate development. But to make things more complicated, rising real estate prices have both fueled social tension and created much-needed revenues for debt-laden local governments.

Since the early 1990s there has been an implicit deal in China between the communist party and the people: the party keeps the control in return for increased prosperity. But Chinese citizens don’t seem to want just economic growth any more. It seems they are now craving more freedom, too. The lack of freedom of press along with the all-permeating corruption are often stated as the core reasons for popular discontent. Uprooting the corruption seems like an impossible task to me. The individual freedoms and liberties are on paper easier to achieve but the Communist Party is likely to resist them with all its might. President Xi for one won’t do anything to destabilize China’s current system. He made it recently very clear: the Party, rather than the State, must continue controlling the military. He has gone on record stating that he learnt a lesson from the collapse of the Soviet Union where the military was depoliticised, separated from the party and nationalized and the party thus disarmed. As a result, according to Mr Xi, the system collapsed.

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