18th Party Congress

Next Chinese leaders face loose ends left by breakneck economic growth

Economic miracles under Hu and Wen shot China to stardom but they are leaving behind an environmental mess and widening wealth gap

PUBLISHED : Monday, 10 September, 2012, 12:00am
UPDATED : Monday, 01 October, 2012, 2:56pm

When the Communist Party's fourth-generation leaders enter the Great Hall of the People for its 18th national congress, they will have a lot to congratulate themselves on, including a decade of rapid economic growth under President Hu Jintao and Premier Wen Jiabao .

But they are leaving behind big challenges for the next leaders, including Hu's heir-apparent Xi Jinping and premier-in-waiting Li Keqiang , who will guide the country's fortunes for the next 10 years.

Chief among those challenges is squaring pragmatic capitalism with one-party rule by what is, in name, a Marxist party.

Nowadays, the Communist Party - the world's largest political party, with more than 80 million members - claims that its rule is legitimised by its ability to make the world's most populous nation prosperous.

Since taking office in 2002, the current leadership has overseen the continuation of one of the most remarkable economic transformations in history, taking China from the sixth-largest economy to No2, behind the United States.

China has become the wealthiest nation in terms of foreign reserves, at over US$3.2 trillion. It is the world's largest exporter and car producer and has the world's longest high-speed rail system.

In 2000, just over one million cars were sold on the mainland but the number rose to 16.6 million last year, surpassing America's 11.6 million. Market research firm J.D. Power predicts that by 2018, the mainland market will reach 33 million vehicles a year - more than in the US and the European Union combined.

The mainland's agricultural sector has also experienced stable development and recorded increased grain production for eight consecutive years.

The Hu-Wen administration has overseen the world's largest poverty-eradication campaign and lifted tens of millions of people out of misery, with per capita annual income growing from US$800 to more than US$4,000 in the past decade.

In the past two years, the country has also replaced America as the biggest single contributor to global economic growth, accounting for 17 per cent of the expansion in global output in 2010 and 30 per cent last year.

With its growing economic clout, China has become one of those setting the rules in the global game, representing developing countries in the restructuring process after the 2008 financial crisis.

Zhuang Jian, senior economist with the Asian Development Bank's China Resident Mission, said the government had succeeded in steering the economy out of the 2008 crisis and was on track to do the same with the ongoing European debt crisis. He also said improvements had been made in housing, medical care and social welfare (although more needed to be done), as well as energy conservation and environmental protection.

Zhuang's view appears to be supported by official data. Statistics suggest the government hit or exceeded all eight obligatory targets in the 11th five-year plan (2005-2010): population control; energy and water consumption per unit of gross domestic product; reduction in emissions of two major pollutants; area of cultivated land; urban social security coverage; and rural co-operative medical coverage.

However, analysts at home and abroad say the Hu-Wen administration generally failed to live up to expectations on economic reform and social development.

When they came to power, Hu and Wen called for a reorientation of China's development strategy, away from cutthroat economic growth and towards sustainable, balanced and people-oriented growth.

But some analysts say the past decade's leap has been achieved at excessive cost, with environmental damage, a deteriorating economic structure and an ever-widening rich-poor gap.

The Hu-Wen government came to power at a time when hopes for reform were high following China's admission into the World Trade Organisation. Hu quickly made three key policy goals, calling for a scientific concept of development, people-oriented policies and building a harmonious society.

Under Hu's pronouncements, the administration was tasked with improving the country's economic structure and boosting socio-economic equality, creating a society that was prosperous and free of conflict.

The idea was to restructure the economy in order to achieve more balanced and sustainable, consumption-driven growth, which would be made possible by a fairer distribution of wealth. The country also wanted to cut its over-reliance on exports and capital investment.

But critics say the administration has reached few of the goals set by Hu, particularly in economic reform. Those goals included curbing widespread official corruption, reducing bureaucrats' economic power, breaking up state monopolies in many highly profitable sectors, deregulating state controls on prices, and restructuring the banking and financial markets.

Jianguang Shen, chief economist at Mizuho Securities China, says there are three unresolved issues left up to fifth-generation leaders. The country's economic structure is less balanced, state influence has risen while the private sector has suffered, and income disparity has increased.

Shen said the government had failed to shift growth away from a dependency on fixed-asset investment and towards private consumption, reduce its trade surplus or increase the service sector's share in the national economy.

"The investment ratio rose further, while the consumption ratio dived," Shen said. "The current account surplus reached record highs and the share of services remained stagnant."

Fixed-asset investment accounted for 49.2 percent of gross domestic product last year, the highest level ever recorded outside Soviet-style economies.

And the imbalance continues to worsen, with urban fixed-asset investment growing 20.4 per cent in the first half of this year, while nominal GDP grew 11 per cent, suggesting that investment's share of GDP may have topped 50 per cent.

State-owned enterprises (SOEs) have experienced tremendous growth in the past decade due to the inherent advantage of having government backing, but private firms face more obstacles.

Despite their poor quality management and services, four state-owned banks - Industrial and Commercial Bank of China (ICBC), China Construction Bank, Bank of China and Agricultural Bank of China - have become the world's largest financial institutions in terms of profits and market capitalisation in the past two years, surpassing American and European lenders.

There are 30 SOEs in Fortune magazine's Global 500 list of the world's biggest companies, up from just six in 2002, but only one privately held mainland firm has made the list.

Meanwhile, income inequality between urban and rural residents has also worsened significantly.

In a report last year, the Labour Ministry warned that the wealth gap had widened in the past decade, with incomes in urban areas three times higher than those in rural areas, and the average income of the top 10 per cent of earners 20 times higher than that of the bottom 10 per cent of earners.

Zhang Lifan , a political affairs analyst, said increasingly widespread discontent had many looking back nostalgically to the previous administration led by Jiang Zemin and Zhu Rongji .

Zhu, a reform-minded and no-nonsense economic tsar, took a tough stand against corrupt officials, fostered a market-based economy, brought China into the WTO, overhauled state-owned enterprises and restructured the banking system.

Liu Kang, director of Duke University's China Research Centre, said: "Generally speaking, the Hu-Wen administration is more conservative in both politics and economic policies than previous administrations."

Despite the economic progress the country had made in the past decade, Liu said the party was facing a more severe challenge - that of challenges to the legitimacy of its rule.

Liu cited social tension, ideological conflict, widespread corruption and internal power struggles as fresh challenges, adding that "things have only deteriorated, rather than improved, and citizens have thus become less satisfied and happy than a decade ago".