When China Rules the World (29 page)

One advantage that the government enjoys in this situation is that the renminbi is a non-tradeable currency and therefore not subject to volatile movement or speculation. The government has hitherto resisted the temptation to liberalize the capital account and allow the renminbi to float, which would have the effect of enhancing the renminbi’s role, promoting China’s financial position and making it easier for Chinese firms to invest abroad. The main downside with such a strategy is that the savings which have underpinned China’s huge level of investment might be undermined as savers go abroad in search of rates of return far in excess of the paltry levels they can find at home, thereby denying the country the funds for investment that it has hitherto enjoyed, with the inevitable consequence that the growth rate would decline. In addition, a floating renminbi would be vulnerable to the kind of speculative attack suffered by the Korean won, Thai baht and Indonesian rupiah in the Asian financial crisis.
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Although Zhu Rongji, the then Chinese premier, intended to begin the liberalization of the capital account in 2000, the Asian financial crisis persuaded him that such a change would be imprudent. The present global financial turmoil only goes to confirm the wisdom of the Chinese leadership in continuing to regulate the capital account, despite persistent calls from the West to deregulate. In due course, a gradual liberalization could well be initiated, indeed there are already clear signs of this, but the Chinese government is aware that the existing system provides the economy with a crucial firewall, especially given its open character and consequent exposure to external events.
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Whatever the consequences of the global recession, there are powerful reasons for believing that the present growth model is unsustainable in the long run, and probably even in the medium term. Indeed, there has been a growing recognition amongst Chinese policy-makers and advisors that important modifications already need to be made to the model ushered in by Deng and intimately associated with his successor Jiang Zemin.
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That process, championed by Hu Jintao, has already begun, with a shift away from the neo-liberal excesses of the nineties and towards a more harmonious society, echoing an older Confucian theme, with a new emphasis on egalitarianism, greater weight attached to social protection, a desire to lessen the importance of exports and increase that of domestic consumer spending, and a turn away from the influence of the United States - or ‘de-Americanization’, as it has become known.
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Such changes are likely to be hastened by the global crisis and attempts to mitigate its effects.

Economic growth cannot depend upon a constantly rising proportion of GDP being devoted to investment, as is presently the case, because it would absorb an increasingly untenable proportion of the country’s resources, thereby imposing unsustainable pressures on consumption, for example. There needs to be a greater emphasis on the efficiency of capital and improving labour productivity, rather than an overwhelming dependence on investment, too much of which is wasteful: if not, economic growth will inevitably decline as the limits to higher and higher volumes of investment assert themselves. The ability to move up the technological ladder is fundamental to this. There is considerable evidence that this is already happening, with exports of cheap-end products like toys falling in the global recession and those of high-tech products rising. Similarly China will have to reduce its present level of exposure to foreign trade, which has made it highly vulnerable to cyclical movements in the global economy, as the global depression has shown. There is a danger too, especially in the context of a depression, that China’s export drive will provoke a hostile reaction and moves towards protectionism.
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Instead, it is already abundantly clear that China will have to attach greater weight to domestic consumption.

A growing problem is that the priority attached to breakneck economic growth above all else has resulted in China moving in a very short space of time from being a highly egalitarian society to becoming one of the most unequal in the world.
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The causes of that inequality are threefold: the growing gulf between the coastal and interior provinces, with the richest province enjoying a per capita GDP ten times that of the poorest (compared with 8:1 in Brazil, for example);
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between urban and rural areas; and between those in the formal economy and those dependent on informal economic activities.
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This is leading to growing social tension - evident, for example, in the relationship between migrant workers and local residents in the cities - which threatens to undermine the cohesiveness of society and the broad consensus that has hitherto sustained the reform programme.
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The government has already begun to pay much greater attention to promoting a more egalitarian approach, though so far with limited effect.

A key question here is the financial ability of the state to act in the ways that are needed. In the early reform period, decentralization was deliberately encouraged, with central revenue falling from 34 per cent of GDP in 1978 to a mere 6 per cent in 1995, according to the Chinese economist Hu Angang.
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The state found itself increasingly shorn of many of its old sources of revenue and responsibility.
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Expenditure by the central state, in its turn, came to account for a rapidly declining proportion of GDP: 31 per cent in 1978, reaching a trough of around 11 per cent in 1995. By the mid nineties there was deep concern about the loss of central state capacity that this involved, including the latter’s ability to promote balanced development between the regions, and a determined attempt was made to reverse the process. There were even fears that individual provinces were beginning to operate like independent countries, with an increase in their external trade and a decline in trade flows between them.
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As a result, the government introduced major tax reforms including, for the first time, taxes specifically earmarked for central government; previously, central government was dependent on a share of the taxes raised in the provinces, based on a process of bargaining between the two. The central government also acquired its own tax-collecting capacity, with a large majority of revenue now being collected centrally, some of which is then redistributed to the provinces.
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Not surprisingly, the rich provinces strongly resisted paying higher taxes to central government.
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By 1999, however, state expenditure had risen to 14 per cent of GDP and by 2006 to around 22 per cent.
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Crucially, the state needs to be able to fund its new social security programme in order to provide for the tens of millions of workers made redundant by the state-owned enterprises which had previously been responsible for virtually all of their employees’ social needs, including education, health and housing.
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The problem is particularly severe with education and health, which have suffered from very serious public under-investment during the last decade, a cause of deep popular concern and resentment.
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The government is deeply aware of these problems and in 2008 alone education expenditure was budgeted to rise by 45 per cent.
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During the Maoist period, the state was responsible for almost 100 per cent of health expenditure: the figure is now around 16 per cent compared, for example, with about 44 per cent in the United States and over 70 per cent in Western Europe. As a result, a majority of the population can no longer afford healthcare. In April 2009 the government announced a major reform of the health system, including the short-term goal of providing basic insurance cover for 90 per cent of the population. The lack of a decent safety net and the threadbare character of key public goods fuel a sense of deep insecurity amongst many people, acting as a powerful incentive for them to save, even though the living standards of the vast majority, especially in the cities, have greatly improved.
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Finally, China’s growth has been extremely resource-intensive, demanding of land, forest, water, oil and more or less everything else. Herein lies one of China’s deepest problems.
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The country has to support an extremely large and, for the most part, dense population in a situation where China is, and always has been, poorly endowed with natural resources. It has, for example, only 8 per cent of the world’s cultivated land and yet must sustain 22 per cent of the world’s population; in contrast, with only a fifth of China’s population, the United States enjoys three times as much arable land and its farmland has been under human cultivation for one-tenth of the time of China’s.
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China’s development, moreover, is rapidly exhausting what limited resources it possesses. Over the last forty years almost half of China’s forests have been destroyed, so that it now enjoys one of the sparsest covers in the world. In 1993 it became a net importer of oil for the first time and now depends on imports for almost half its oil needs.

As a result, China is becoming increasingly dependent on the rest of the world for the huge quantities of raw materials that it needs for its economic growth. It is already the world’s largest buyer of copper, the second biggest buyer of iron ore, and the third largest buyer of alumina. It absorbs close to a third of the global supply of coal, steel and cotton, and almost half of its cement. It is the second largest energy consumer after the US , with nearly 70 per cent produced from burning coal. In 2005 China used more coal than the US, India and Russia combined. In 2004 it accounted for nearly 40 per cent of the increase in the world demand for oil.
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If the Chinese economy was to continue to expand at 8 per cent a year in the future, its income per head would reach the current US level in 2031, at which point it would consume the equivalent of two-thirds of the current world grain harvest and its demand for paper would double the world’s current production. If it were to enjoy the same level of per capita car ownership as the US does today, it would have 1.1 billion cars compared with the present worldwide total of 800 million; and it would use 99 million barrels of oil a day compared with a worldwide total production of 84 million barrels a day in 2006.
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Of course, such a level of demand would be unsustainable in terms of the world’s available resources, not to mention its global environmental impact, which would be dire.

The effects of China’s great paradox - namely, a huge abundance of human resources and extremely sparse natural resources - are being experienced throughout the world via the global market. China’s surfeit of labour has meant that the prices of manufactured goods it produces have fallen drastically while the prices of those commodities that China requires rose dramatically until the onset of the credit crunch. Together these constitute what might be described as the new China-era global paradigm. The great beneficiaries of China’s growth, hitherto, have been the developed countries, which have enjoyed a falling real price for consumer goods, and those nations which are major producers of primary products. The present global recession has seen a sharp fall in commodity prices, but there is little reason to believe that their rise will not be resumed once economic conditions start to improve again, driven by demand from China and India. The International Energy Agency has forecast that oil prices will rebound to more than $100 a barrel as soon as the world economy recovers and exceed $200 by 2030.
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The resumption of rising commodity prices will make the present resource-intensive Chinese growth model increasingly, and ultimately prohibitively, expensive. Beyond a certain point, therefore, it will be impossible for China to follow the resource-intensive American model of progress; and that will happen long before China gets anywhere near the US’s present living standards. Indeed, it is already clear that China has decided to pursue a less energy-intensive approach.

China, however, will find it extremely difficult to change course. For centuries it has pursued a highly extractive approach towards a natural environment which, compared with that of most nations, is extremely poorly endowed with resources, most obviously arable land and water, as measured by population density. China, for example, has only one-fifth as much water per capita as the United States. Furthermore, while southern China is relatively wet, the north, home to about half the country’s population, is an immense parched region that threatens to become the world’s largest desert.
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The Chinese state, from the great canals of the Ming dynasty to the Three Gorges Dam of the present, has long viewed the environment as something that can be manipulated for, and subordinated to, human ends.
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The level of environmental awareness, on the part of government and people alike, has been very low, though this is changing rapidly, especially in the main cities. The poorer a society, moreover, the greater the priority given to material change at the expense of virtually all other considerations, including the environment. It is much easier for a rich society to make the environment a priority than a poor society - and China remains a relatively poor society. By 2015 China will only have reached the same standard of living as most Western countries achieved in 1960 and the latter, able to draw either on their own natural resources or those of their colonies, enjoyed the luxury of being able to grow without any concern for environmental constraints until they were already rich.
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In European terms, China has torn from the eighteenth century to the twenty-first century in little more than three decades, pursuing a similar resource-intensive strategy, with the environment never more than a footnote. The result is a huge ecological deficit of two centuries accumulated in just a few decades: growing water shortages, over three-quarters of river water that is unsuitable either for drinking or fishing, 300 million people lacking access to clean drinking water, rampant deforestation, sixteen of the world’s twenty worst-polluted cities, acid rain affecting a third of Chinese territory, desert covering a quarter of the country, and 58 per cent of land classified as arid or semi-arid.
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