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China’s State of the Union: A more Equal Society

Damien Ma, Fellow, Paulson Institute
March 5, 2012
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For Wen Jiabao this National People’s Congress (NPC) will be the beginning of the end of his political career. Not only will the premier deliver an economic agenda for his final year in office, it will also be an occasion to assess the national pulse and begin crafting his legacy.

It’s not difficult to imagine the sort of dizzying figures Wen can tick off as accomplishments. Under his watch since 2003, China has sprinted past Japan as the indisputable second-largest economy in the world, leaving 2011 behind with a GDP north of $7 trillion. Trade has exploded - a major reason behind China’s accumulation of the world’s largest foreign exchange reserves at $3.2 trillion. For the last three years, Wen, like Premier Zhu Rongji a decade before, has managed to put out economic fires resulting from yet another financial crisis. About those hard landing fears? They have evaporated too, as Wen and company saw an economy that touched down softly at 9.2% growth in 2011.

Not a bad brag list, to say the least. But Wen has his share of critics, many of whom sense that political and institutional reforms have been retarded at the expense of economic growth. Many others feel that the stimulus policies Wen sanctioned merely reversed progress on the crucial enterprise of shepherding the economy onto more sustainable footing. Indeed, digging just beneath the surface sheen, there is much less cheerleading and many more gripes. That is because the central priority for the Chinese government is no longer simply about economic growth. Rather, the chief challenge is dealing with the sociopolitical tensions and inequalities that are products of that growth. On these two fronts, the Wen administration record has been far less than stellar. Moreover, facing the unprecedented ferocity of public opinion, the government is increasingly having its feet held to the fire on issues of social equality and quality of life. 

This is why Wen is poised to announce an annual growth target that is below the magical 8%, seemingly immutable over the last several years. The target in and of itself means little - that the Chinese economy will slow in 2012 is virtually assured. In fact, the average growth target through 2015 has been set at 7%, according to the 12thFive-Year Plan. Instead, the lower target is likely meant to serve as a political signal for officials to become less GDP-obsessed and more people-oriented. After 35 years of breathless expansion of the economy, the growth story is less compelling for the Chinese public. Growth alone is no longer the panacea that papers over structural problems or ensures political legitimacy of the regime.

Why? Because the Chinese public, particularly the rising middle class, has started to notice that for all the talk of the Chinese economic miracle, they have not miraculously grown wealthy. Some have indeed become obscenely rich, which only serves to reinforce the sentiment that the system is tilted towards the few and stacked against the many. Adding fuel to the fire is that those who have been blessed by the growth miracle happen to be the political class itself or just one degree removed.

A prominent example of this condition will be on full display at the NPC itself, which has lately become something of a red-carpet event, with a Chinese media circus chasing a star-studded cast of politicians and delegates from the public and private sectors. But it is the nearly 3,000 delegates of the NPC who broadly represent the establishment that has disproportionately benefited from China’s economic pie. Of the thousands of delegates, 70 of the richest have a combined net worth of $90 billion, according to Bloomberg. To put that figure in context, it translates into more than $1 billion per delegate, while the average urban income is just $3,500 in 2011.

Such vast inequality is as obvious as it is striking. The NPC counts private sector moguls among its delegates, such as Zong Qinghou, chairman of Chinese beverage behemoth Wahaha Group. For even most of the Chinese “elites” - those in the middle class and highly educated - opportunities for upward mobility seem limited and reserved for a group to which they do not belong.

It is not that the top leaders like Wen don’t recognize the clear and present dangers of inequality at a time when China still remains relatively poor and underdeveloped. In fact, Wen will likely make a spirited push for wealth distribution in the form of boosting incomes and rapidly expanding social welfare benefits. His last year in office will likely prioritize a host of social policies, from affordable housing to healthcare. Perhaps in his own way, Wen is pitching a “New Deal” to close the gap in inequality and balance growth.

Yet to some, his pitch will ring hollow. Pursuing a set of welfare-based policies is necessary but hardly sufficient in resolving what is becoming a self-perpetuating condition. To do so will likely require systemic changes. Entrenched interests in China, like in any country, have the necessary resources and political capital to defend and advance their interests. Breaking their domination on how the economic windfall is distributed will likely take some inspired leadership and a willingness to earn fast political enemies.

Who will champion an assault on the entrenched interests? At this point, it won’t be Wen, whose waning days in office will be preoccupied with both managing an economic slowdown and political transition. The hope, then, is pinned on the incoming cohort of leaders, whose credibility and credentials remain largely untested or unknown. Nevertheless, it is clear that something must be done, before the widening inequality becomes a more severe political liability.

Damien Ma is an analyst in the Asia practice at Eurasia Group.

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