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Can Chinese Leaders Sustain its Rise?

Nov 08 , 2013

The leadership of China is set to gather in Beijing on Nov. 9-12. The meeting will take place minutes away from where a SUV recently plowed through pedestrians and crashed in flames at Beijing’s Forbidden City below the portrait of Mao in a suicide “terrorist” rampage apparently carried out by ethnic Uighur minority people. The attack killed five people and injured 38.

Tom Watkins

The Beijing plenary meeting of the party’s Central Committee, which includes President Xi Jinping, Premier Li Keqiang, top ministers and the heads of the biggest state-owned enterprises and banks, will produce a heated debate on deepening reforms.

The Chinese leaders have an unenviable problem–how to sustain its explosive economic rise. They have a dragon by the tail as they try to manage economic growth as it shows signs of sputtering.

China’s economic challenges are exacerbated by: rising minority tensions (particularly among Uighur and Tibetan people), inflation, rising labor cost, corruption, environmental degradation, an aging society, soaring  property values/bubbles, a significant outflow of capital, a shadow banking system and local government debts that make bankrupt Detroit blush–are warning signs that China’s economy could come off track.

Leaders Predict Smooth Sailing

Yu Zhengsheng, the fourth-ranked member in the elite Politburo Standing Committee of the Communist Party, said the closed-door meeting would “principally explore the issue of deep and comprehensive reforms”.  “The reforms this time will be broad, with major strength, and will be unprecedented,” Yu continued.

It is likely the reforms will focus on providing broader social services–including better health care, education, and pension service to help free up consumer spending–as it stands now, the average Chinese citizen saves a disproportional part of their earnings.

Chinese President Xi Jinping is confident that China will have healthy economic growth and will not fall into a middle-income trap, as he recently told a group of Chinese and foreign business leaders.  President Xi declared,  “We are currently changing our way of development, adjusting our economic structure, accelerating our new style of industrialization, promoting technology, urbanization and agricultural modernization.” The President continued,  “The domestic elements supporting China’s economic growth are sufficient.”

All Politics Are Local– With Global Impact

China and the United States hold the most important bilateral relationship of the 21st century.  Few Western leaders raise issues to cast aspersions on China or to interfere with their internal affairs.  No one should denigrate the remarkable progress China has made throughout recent history while acknowledging its significant challenges.  Nor should anyone wish China to fail.  To the contrary, the world needs China to succeed.

There’s no doubt that China has soared. Consider:

  • 400-500 million people have moved from abject poverty to a Chinese middle class.
  • China has become one of the world’s fastest growing large economy.
  • Chinese students significantly outperform U.S. students on international tests.
  • China is the world’s largest auto producer.
  • China has become a banker to the U.S., owning more than 20 percent of our total debt.

There exists an economic interdependence between the U.S. and China today that continues to lift both our country’s boats while, hopefully, preventing military aggression.

The Party leaders soon will debate how far President Xi can and should go to restructure China’s economy. Clearly China has to rebalance its economy away from reliance on cheap labor and exports to more domestic consumption. The heated debate will be on the “how” or if they should try to continue to ride the economic dragon that has catapulted China into the fastest growing large economy in the world.

Forbes Magazine puts it this way “Doomsayers reckon that the days of rapid growth are over and that China has to rebalance its economy – more consumption, less state meddling – if it’s to dodge the so-called ‘middle-income trap’”.

Bloomberg reports, The November gathering will be the third full meeting of the current Central Committee. It was at such a third plenum in late 1978 that Deng Xiaoping and his allies inaugurated a series of economic reforms that began to open up China to foreign investment and loosen state controls over the economy.  “We expect a comprehensive list of reforms to be provided,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said. The changes will be “critically important for the economic outlook,” Zhang continued.

The world needs the Chinese leaders to rebalance its economy and spark both internal and global growth. This will require managing the Chinese people’s expectations hopes and their “Chinese Dreams.”

Managing Expectations

Kerry Brown, Professor of Chinese Politics at Sydney University points out,  “High growth motivates people. China’s economic model in the last decades has created huge inequality, but it has also allowed most of the population to see some sort of tangible impact of their lives from this growth. For the first time, Chinese people are contemplating a future where they are likelier to see stagnation rather than dynamism. The popular response to this towards the government in terms of protest and expressions of frustration might be harsh, and the loyalty of people to the state which can no longer deliver high growth might prove itself to be very weak indeed.”

There has been an unwritten trade-off between the Communist Party and the people. Simply put: “The people’s lives continue to prosper economically and the Communist Party continues its rule.”

As President Xi knows and as Mao once proclaimed, “A single spark can start a raging forest fire.”

An iron fist and a rising economic tide is the formula that has thus far kept China from being added to the list of countries in revolt. This “mandate from heaven,” will be the magic formula the Chinese leaders will be searching for as they soon gather to keep Deng Xiaoping famous quote alive, “To get rich (and stay rich) is glorious.”

The road ahead is hazardous. The Chinese leaders continue to follow Deng Xiaoping’s path of  “Socialism with Chinese characteristics”(Zhōngguótèsè shèhuìzhǔyì) as the official ideology of the Communist Party of China.  This ideology supports the creation of a socialist market economy that has been dominated by the public sector.  Chinese Communist thinking is China is in the primary stage of socialism—a view which explains the Chinese government’s flexible economic policies to develop from an industrialized to a innovation nation.

Deng Xiaoping — “We should do more, and talk less.”

This flexibility and practicality is best summed up in Deng’s famous quote: “It doesn’t matter whether the cat is black or white, as long as it catches mice.”

As the Chinese leaders gather they will be attempting to navigate this economic pivot following another of Deng Xiaoping’s famous quotes–”crossing the river by feeling for the stones.”

For the Chinese people, and all humanity- let’s hope they take the correct path –as they feel for the stones.

Tom Watkins has been working for more than 3 decades to build economic, educational and cultural ties between the US and China.  He is advisor to the University of Michigan Confucius Institute, Michigan’s Economic Development Corporation and Detroit Chinese Business Association.  Follow him on twitter @tdwatkins88 or email him at: tdwatkins88@gmail.com

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