China’s Economy and Politics Over the Past 10 Years and Going Forward
The pivotal 18th Congress of the CCP is winding down and a group of new leaders will be anointed to steer the world’s second largest economy onto a more sustainable path of development and reform, both economically and politically. The Singapore research team at Capital Economics dubbed the Chinese leadership change as more significant to especially emerging economies than the re-election of Barack Obama. It may be worthwhile here to review China’s transformation over the last ten years since the last leadership change and gauge the way forward.
Surging economic growth has been the main hallmark of the past decade. China leapfrogged from 5th place in 2002 to the world’s second largest economy, averaging 10.6% annual GDP growth and hitting a high of 14.2% in 2007 before the global financial meltdown. Growth has since slowed considerably to 9.2% last year and most likely will end up with 7.5% to 8% this year. Government and private economists expect +7% growth to be maintained for the remainder of the decade.
In line with rapid GDP growth has been a more than quadrupling of per capita incomes from around $1000 dollars a decade ago to last year’s US$5400, according to World Bank and IMF figures. In the cities, the average minimum wage rose on average 12.5% from 2006 to 2010 and going by government forecasts, wages will keep rising by 13% a year into 2015. In his goodbye speech to the 18th Congress last week, General Secretary Hu Jintao reiterated the plan to double 2010 GDP and per capita incomes of both urban and rural residents by 2020. By 2030, the World Bank conservatively projects per capita incomes to triple to around $16,000.
Under the current five-year plan (2011-2015), the government has pledged to grow incomes by more than 7% a year which would result in a doubling by the end of the decade. At the same time, the yawning gap between the rich and poor has become a highly sensitive issue. Despite absolute income gains, average urban disposable incomes are only about $3500 a year and much lower in the countryside. According to the United Nations Development Program (UNDP), about 13% of Chinese people in poor and remote areas still live on less than $1.25 a day.
In a poll of 1200 adults across major Chinese cities just prior to the 18th Congress, the Global Times newspaper found the vast majority of respondents increasingly concerned about the their livelihood and social security. Over 70% want the government to up efforts vigorously in providing universal medical care, retirement pensions and social security in the years ahead.
Consumer spending has ballooned over the past decade driven by rising incomes amid fast-paced urbanization. Increasing spending power by the 150+ million strong middle class is set to propel the country to become the world’s largest consumer market by 2015 with retail sales hitting $5 trillion. So far this year, household and government consumption together accounted for about 55% of GDP, the first time that consumption surpassed investment as the main driver of GDP growth.
Residential consumption which has been growing like gangbusters over the past decade reached 16 trillion RMB ($2.56 trillion) last year and is expected to climb to 30 trillion in 2016 and as much as 50 trillion by 2022, forecast a researcher from Hainan-based China Institute for Reform and Development.
General Secretary Hu committed the government to spurring the transformation from an export-led economy to one based mainly by domestic demand. He told 18th Congress delegates: “we should firmly maintain the strategic focus of boosting domestic demand, speed up the establishment of a long-term mechanism for increasing consumer demand, unleash the potential of individual consumption, increase investment at a proper pace, and expand the domestic market.”
On the political front, Mr Hu underscored the importance of political reform, fighting corruption, and strengthening the rule of law, all of which the people seem to yearn for. The Global Times survey found more than 81% of respondents desired a faster pace in political reform, with vast majorities demanding public and media scrutiny and punishment of illicit official behavior coupled with increasing government transparency. In the fallout of the Bo Xilai, Bogu Kailai affair, they singled out corruption and official abuse as the biggest challenge for the CCP in maintaining social stability.
In a Q & A with Goldman Sachs, Cheng Li, a CCP expert at the Washington-based Brookings Institution, remarked, “(They must) address the crisis of legitimacy raised by the Bo Xilai episode. Political reform will likely be centered on the establishment of an independent judicial system and credible rule of law. This is a more effective way forward for political reform than the pursuit of democracy…In a country without the rule of law, no one is safe. In addition, I believe the new leaders will also aim to adopt more intra-party elections in order to build new sources of legitimacy.”