As we approach the upcoming leadership transition at the Chinese Communist Party Congress on November 8, the trend in China news and reporting is decidedly negative. In addition to a focus on the Bo Xilai scandal, East China Sea standoff, and the slowing economy, there has been an uptick in doomsday reporting on China. The number of articles and commentaries expecting armed conflict between China and Japan and the collapse of the Chinese Communist Party (CCP) in the next decade are surging. Personally I am on the fence as to whether or not the CCP and China can overcome the gargantuan problems facing the country. Clearly missing from this debate is the potential for positive outcomes over the same ten years or even in the near term. These possibilities for success and continued growth in China should not be overlooked.
There is little disagreement that the issues facing China are equal to, or greater than, any of the problems overcome in the previous thirty years. However, there is a complete lack of consensus if China and the CCP are capable of conquering the current set of hurdles. The main problem in creating a viable dialogue on this question is the two diverse ways utilized to approach the subject. Those convinced the China miracle will fail in the next decade present a plethora of data when making their arguments. The exact flaws and obstacles faced by China and the CCP are gone over in great detail.
On the side of those convinced China can overcome its current slate of obstructions there is less concentration on the details. When discussing the future, these China cheerleaders tout the past thirty years as proof any current problems are readily managed. Unfortunately, it is not enough to point out past CCP successes; they must be prepared to discuss exactly how to deal with the questions hampering the economy and society. For a true dialogue to occur it is necessary to clearly identify and elucidate concrete examples the CCP can utilise in the near term to foster the required change. Without such specifics their positive voice will continue unheard in the din of negativity.
Banking, currency, housing, education, and the grey economy are just a few of the growing list of issues facing China. While all of these items require solutions, there are three specific areas I argue should be changed over the next 15 months with the largest immediate impact. Changing the Hukou system, the food safety system, and how China deals with its environment would be perfect precursors to some of the more complicated changes such as the banking system. All three suggestions have already been mentioned as potential changes to the law at the next National People’s Congress in March. In the time span between the Party Congress and the People’s Congress the new leadership of the CCP needs to address these three changes in a way that shows they understand the depth of the problems facing China.
The environment and renewable energy creation are areas the Chinese government has already begun to concentrate on. Up to this point, the measures enacted in these areas have been tertiary to growth and infrastructure. The fear by many in the government is radically improving the environment will slow down economic growth. Rather than being mutually exclusive, a concentration on improving environmental degradation is vital to future economic and GDP growth in China. By focusing on mandatory renewable energy capacity and production a whole new industry can be created. Rather than a focus on exports, the Chinese system can utilise 100% of production for domestic use. Creating additional jobs in manufacturing and installation.
In addition, by focusing on cleaning up the environment there would be several immediate economic benefits. Lower health care costs, additional jobs created to police the marketplace, and new jobs and industries created to retrofit factories with pollution control technologies. Such a decision by China could also lead them into the forefront of high-tech manufacturing by spurring much-needed innovation. The actual up front cost is also not a large issue as China will need to continue to stimulate its economy as the rest of the world suffers from a double dip recession. The money must be spent someplace, it is better allocated to environmental cleanup and renewable energy growth than more airports and highways. If given the same priority as GDP growth in the next five-year plan, protecting the environment and increasing renewable energy creation will increase job creation, lower healthcare costs, and potentially spur needed innovation.
There has been a downward trend in unit for unit food consumption over the last several years in China created by food safety and inflation issues. The safety of domestically produced edible products in all forms is a key issue with Chinese consumers. A lack of faith in the quality and oversight of food production has caused consumers to forego eating out as often as they would like and buying smaller quantities of domestic products. Many shoppers are replacing domestic brands altogether with more expensive foreign brands, spending more per unit while purchasing less in total. Over the same time period the trade in “grey” foreign products, specifically baby powder and children’s foods, has also increased significantly.
Similar to the environment, it is feared a harsh crack down on the safety of food production would hurt the Chinese economy. In the same vein as environmental protection and renewable energy production, the opposite will hold true. By guaranteeing food quality and standards the Chinese government can spur broader consumption and create new jobs in retooling the food manufacturing industries to meet higher standards. While environmental protection and food safety regulation are daunting tasks there is no organisation better prepared for the massive oversight and inspection campaign than the 80 million member strong CCP. Fixing the food safety and environmental issues is a vital link for the CCP to reestablish trust with the general populace.
The final change the CCP can make immediately is likely to have the quickest impact. Much of the current “shortage” of labour on the coasts is caused by the unintended consequences of the Hukou (household) registration system. By reforming this structure, millions of migrant factory and construction workers can officially make their lives in the urban areas in which they already reside. This reform would go a long way to release some of the strain on wage inflation in coastal China. Migrant workers would be more likely to accept the current wages if they can bring their families to live with them, have their children attend local schools, and take part in the more developed and trusted urban healthcare system.
The key economic benefit would be in guaranteeing these workers access to the urban social safety net, services, and products. Instead of a large portion of salaries being sent home to rural areas and typically saved, the money would stay in the urban setting in which the worker lives. The saving rate would decrease as demand swelled for schools, healthcare, and other necessities of life in these urban areas. However, just allowing them to change their Hukou registration with no protections would be of little consequence. The CCP needs to guarantee these migrant workers will be afforded the same treatment as University graduates and white-collar workers that move to urban areas.
Many would argue my suggestions cannot be achieved without systemic reforms in the CCP itself. I believe this outlook is a classic cart before the horse scenario. The CCP has made more important and difficult changes without necessary reform within its ranks. The existing framework and infrastructure of the Party are sufficient to support the changes I am recommending. The concentration shouldn’t be on the ability of the CCP to enact these programs, but on their willingness.
Overall the sheer size and magnitude of the obstacles facing China is frightening. The vast majority of those inside and outside China agree adjustment and change is required if the CCP wants to survive the next decade. I put forth my three changes as areas they can enact with the greatest immediate and positive impact on the Chinese economy. By making these adjustments now they can create additional time to deal with the larger systemic issues such as banking, currency, and education reform. Before we dismiss the Chinese Communist Party and the China Miracle, I think it would behove us to look at all potential outcomes.Originally posted on filterpret.com October 3, 2012