China: A Growth Model In Crisis

What will be the impact of XI Jinping’s new leadership on China’s development model? The answer hinges more on the ability – rather than the desire – to reform its economic structure. In spite of the caution that pervades every decision made by the Chinese leadership, the snarls that need to be unraveled to keep the economy from stalling can be clearly identified. Luckily they are still obstacles ahead, and not mistakes made. They are the contradictions of a growth pattern that has until now accomplished the task it has been assigned: bringing the country out of the fog of underdevelopment, providing for a better quality of life, keeping the CCP in power, and building a strong and respected China. A titanic undertaking has been carried out, but the cycle seems to be reaching its end, and the international financial crisis is forcing the adoption of new measures.
The entire Chinese leadership – including the seven permanent members of the Standing Committee – is aware that corrective measures will need to be taken. Any disagreement is regarding the speed, scope, and impact of the reforms. In very short words, China needs to emerge from its quantitative model based on a never-ending cycle of manufacturing production. In the virtuous cycle of savings-investment-production-export, investment has been the linchpin of China’s success. Today, investment still counts for 50% of China’s GDP, and this imbalance has caused problems that now need immediate attention. Domestic consumption has been left behind, the environment has suffered, labor standards have been ignored; the entire economy has had to submit to its vast merchandise factory. China is known in fact as the “factory of the world,” an immense industrial complex at the service of Chinese and international corporations.
In an attempt at guiding China towards domestic led growth – growing ever more urgent because of the downturn that has hit the industrialized world – there is a need to not only foster domestic consumption of goods, but also to choose a productive structure that is no longer based on the manufacturing of cheap products with a low added value. Wage increases are headed in this direction, because they discourage investment in labor-intensive sectors and offer the working class a bit stronger spending power. They do clash with the traditional investing class, however, who still count on low cost production factors, and private enterprise, who have to be more careful than the state owned companies that enjoy favorable conditions. Private companies are asking for easier access to credit, with more transparent regulation, rather than an opaque network of political connections. The urban class of the giant cities aspires to own a comfortable home without becoming indebted for life. The government has been able to prevent the housing bubble from bursting so far, but prices have remained very high. Most importantly, the combined interests of local administrations, landowners, construction companies, and intermediary agents have not been touched. In the face of tens of thousands of empty apartments and deserted shopping malls, prices have still not peaked. On the other hand, the subdivision of land is a primary source of income for local administrations, who feel themselves frequently penalized the by China’s traditional Beijing-centricity.
It is evident that China’s economic framework is in need of a renewal. Paradoxically, it needs to deny, or even disown, its past, even though it has seen great success. This will be incoming Party Secretary Xi Jinping’s greatest task, at least domestically. His actions will be successful only if he is able to mediate among the various components of the party that elected him. Each one represents and defends a social interest, but it is not a given that there will be room to accommodate everyone. China will need to find different solutions that may be antagonistic. The danger of dissolving the alliance that chose Xi is real, and it is this criteria that will determine the reach of his reforming action.