What Could China look like in the year 2040? A perspective for the next 30 years

from my book “Australia and the World in 2040“. Complete copies available in February 2018

In the early part of the 21st century, China was the fastest growing economy in the world and overtook the US in GDP terms in 2015. It also had the greatest foreign surplus in the world, and was the largest lender to the US, the biggest foreign debtor nation in the world.

When Xi Jinping came to power in 2011, the per annum growth of China’s economy was beginning to slow from the heady 10-15% rates for most of the 25 years to 2012 to a more modest 6-8%. Although still very high by world standards, slow growth in China meant a lessening of the Communist Party’s legitimacy (at least that was the fear in the minds of its leaders). Much of the high growth in that 25 year period had come from the rapid industrialisation brought about by Deng Zou Ping’s reforms at the 1979 plenum which turned the country into a market economy, at least for manufacturing products.

This resulted in about 400m people migrating from the country sides into cities where they manned the new factories, often in very primitive conditions. It nevertheless saw most of those 400m people go from rural poverty to earning a living wage – an unheard of event anywhere in the world up until that time. By 2010, though, much of China’s advantages in basic manufacturing were eroding with higher wages, higher costs and a higher exchange rate. Many factories were moving to lower cost countries such as Vietnam, the Middle East and Africa.

China now faced new reform challenges, which would see itself move up the “food chain” from low skill manufacturing, to high tech, innovative design and manufacturing. It also needed to rapidly develop its services sector such as education, finance, medical, bio-technology.

They also needed to rapidly reform agriculture where there was no private ownership of land (it was largely controlled by regional party chiefs), so there had been nothing like to development of rural land under private ownership equivalent to what had happened with city dwellings. As a consequence, Chinese agriculture was low tech, low productivity, and the peasants had little incentive to develop their land.

They also singularly lacked what most western countries took for granted, and which China’s rapidly growing and well educated middle class were demanding: rule of law, modern government services such as a social security safety net, modern hospitals, pensions, consumer laws, environmental laws. Most of all though, what Chinese people most wanted was a society free of corruption, especially by part bosses.

At the historic plenum in 2013, Xi Jinping discussed and flagged a number of reforms which in many ways exceeded Deng Zou Ping initiative in the early 1980s. For the first time, the Plenum’s official document committed  for markets to play a “decisive” role in the allocation of resources in the economy. In the coming years this lead to the role of state own enterprises being considerably diminished, with many of them being privatised or closed (if they were too inefficient).

The SOEs, which in 2013 represented over 50% of economic output, were also expected to stand on their own merits in terms of funding, and banks were liberalised and skilled in terms of their commercial lending activities in order for this to be brought about. These reforms resulted in a number of enterprises going to the wall (bankruptcies in SOE’s were allowed for the first time in 2016), but it also resulted in a number of them becoming internationally competitive, and a number of them grew into major global corporations. In 2014, there were 2 Chinese companies in the top 1000 companies (outside the US) by capitalisation. By 2030, there were 55, all growing out of reformed SOEs of 2014, and all public companies floated on the Hong Kong and Shanghai Stock exchanges

To support the 2013 reforms, financial institutions were up-skilled in money market operations as the Party announced that as of the end of 2014 there would be a partial float of the Yuan and a full float by 2016 when it would become the single Chinese currency, both domestic and international, and would be fully convertible. When this came about in January 2016, the currency rose by 25% against the US dollar. Interest rates became market determined by the beginning of 2015, the Chinese Central Bank was made independent of day to day government directive, but was required to work within parameters determined by the government to achieve certain economic outcomes such as exchange rate bands, inflation and unemployment had to be kept within certain bands. Between 2015 and 2020, the government also spent $250m in computerizing their services, particularly to online services, and in boosting the activities and sophistication of the Chinese Bureau of Statistics.

All these changes were primarily designed to make the economy more transparent, less corrupt,  and oriented to moving away from growth coming from investment in export industries to growth coming from productivity improvements and rapidly expanding consumer demand at home. The reforms included:

  1. key economic reforms such as liberalising the setting of interest rates (ie to the market), incentivising innovation, loosening the grip of competition-stifling state-owned enterprises (SOEs) on vital areas of the economy;
  2. allowing private ownership of rural land, and removing the ban on rural residents buying land in cities, which would allow peasants to cash in on the value of the land they work, and thus bring them up to the status of their urban equivalents. It was also hoped that this would unleash a flood of new investment in rural areas, modernising agriculture, and unleashing a further round of rapid growth, It is also seen as a key way to unleash pent up spending from rural areas which would become a major area of growth in consumer spending. This is exactly what happened from about 2018 onwards; and
  3. setting up an independent judiciary at local, regional, and national levels

While at the same time as bringing these economic reforms into being, Xi signalled there would be no political liberalisation following the Plenum in 2013. In fact he considerably strengthened the state security apparatus, doubling its budget between 2013 and 2020. Real political reform would not come until Xi successor came to power in 2023. Over Xi’s time in office, political reforms did take place mostly in the countryside, starting with the election of party officials on local councils. To stand you had to be a member of the communist party, but there were real secret ballot elections as early as 2015 in a number of rural areas. This soon spread to provincial governments by 2020, and the party then formalised its already existing factions of conservative, moderates, modernisers and liberals. If a citizen wanted to vote or stand, you had to be a member of the party. This meant that by the time the President and polit-bureau was elected by all party members in 2028, the party itself had grown from 40m members in 2013 to 750m members. 85% of these members voted in the 2028 elections.

China had always thouight of itself as a great power, it is just that western countries had not allowed it to take what regarded as its rightful place in world affairs. Since 2015, when it became the biggest economy in the world, it began to re-assert itself in the manner of a great power: by 2018, it had 4 million men under arms, 30 nuclear powered submarines and 5 nuclear powered aircraft carriers, and over 5000 supersonic strike fighters which many in the west regard as superior to the US F35 Joint Strike Fighter. It also had a global network of weapon carrying drones controlled out of Hong Kong, and a formidable international spy network.  As a great-power, it had considerable reach, but saw its primacy as being in the AsiaPacific region. The Americans also thought of themselves as an AsiaPacific power, particularly since Barrack Obama refocused them away from Europe and onto Asia in about 2010. Since then, the Pacific became the primary battleground. Interestingly though, it was not the Pacific but the Indian Ocean where tensions initially first came to boiling point between the world’s two superpowers.

Being the largest trading nation in the world, China in 2015 had built its navy into a significant blue water force, although it was still some way behind the US and even India, whose navy was by far its most significant military force. China was determined to make sure all its sea-lanes were kept open, and that trade could flow in and out of China without interference.  In 2015, the most significant of these was not in the Pacific, but in the Indian Ocean. Or, more specifically, the Arabian Sea. This had been for a century or more, one of the busiest sea highways in the world, and was critical for China in particular as the Persian Gulf was its major source of oil and gas. Since the early 1990’s, there has been a great deal of lawlessness around such states as Somalia, Yemen, and the Sudan, in many ways failed states. Somalia also played host to a network of pirates who specialised in boarding western (and sometimes Chinese) freighters, taking their crews and passengers hostage, and then demanding and getting tens of millions of dollars in ransoms.

By 2015, China had just about enough of this. In spite of a large of navies – British, French, German, Italian, American, Australian, Indian, Scandinavian and Japanese – patrolling the Arabian Sea, these hijackings persisted, and were even becoming more daring. China decided to act. First, in the face of mounting international criticism, they sent several divisions of para-troops into Somalia and effectively destroyed the pirate’s operating bases, and killed many of them. Secondly, they put pressure on world banks to freeze their assets. And thirdly, they captured and banished their leader, Jacda Bashire, to the international court in the Hague to be tried (ironic, since they were not a party to the treaty which set the Court up, and did not recognise it as a legitimate legal entity which could preside over its citizens – the same as the US). This effectively ended the pirate operations, at least for some time.

There still remained a core group of criminals who had a organisational structure, and significant wealth through ransoms. On June 5, 2017, one of China’s increasing number of cruise ships was streaming through the South China Sea 2000 kilometres south of Hong Kong and 1000 km east of Vietnam. I was 5.13am. There was an explosion. All 4232 people on board perished, 96% of them being mainland Chinese.

…..to be continued

Why Muslin Demonstrations are Different

It is very disturbing and very disappointing to see the over-reaction of Muslim youth in many countries to what was an incredibly stupid movie posted online about the Prophet. As a firm non-believer, it is difficult for me to understand such religious fervour , but what I can say is I can appreciate the reasons for the revulsion of the general population to such violent demonstrations, when such revulsions are not as apparent in other religions’ over reaction in to slights on their beliefs.

The problem with the public face of Islam is it is almost always predominantly male, young and thuggish. The other religious demonstrations, for instance, the Christian reaction to “The Life of Brian” , which was in many ways equally insulting to Christ, but the reaction was peaceful, predominantly female, and middle aged. It also saw the humour in it, which these young thugs singularly lack.

It is reasonable to ask what is it in Islamic upbringing that does not allow a significant portion of their flock to bush these “insults” off as the stupidity they are? The fact that they can’t, or won’t, both scares and alarms large sections of the Australian population, and creates a backlash against a religion which when practiced in its mainstream is civilising, gentle and inclusive.

The elders of the Muslim faith urgently need to look at their education system, their practices and the way they bring up their children to ensure these extremes are marginalised and such behaviour is shunned universally, by both Muslims and non-Muslims.

A Deadly Raid

Comment on the Economist article (31 May 2010) “A Deadly Raid”

Until both sides realise that incidents like this will continue until there is a peace deal, this situation is unavoidable. Israel continues to believe that a country with a population of 5 million can use military force to suppress 100m plus around its borders.

The only solution is to stop the settlements, withdraw to the pre 1967 borders, and make peace with the whole of the Arab world. Then have this supported by a million plus troops from UN peace keepers paid for largely by petro dollars, and allow Palestine (Gaza and the West Bank) to develop peacefully into a low cost economic haven right in the middle of the middle eastern powers.

Heaven forbid, Israel may well get on with their neighbours very well, share a common prosperity, even eventually participate in a middel eastern common market. The region could then become a force for good in the world rather than be the reason for most of the world’s conflicts between islam and the West.

Wall of Suspicion

Comment in response to the blogs about the Economist article (March 26. 2010) “Wall of Suspicion”

Stefanek, if you are going to accuse others of not getting their facts straight, then how about it yourself.
Quote from you: “Tiny Israel has one of the ten biggest economies in the world without any natural resources except brain power”.
According to the UN for 2009 (no doubt you would regard this as an anti Israeli conspiracy as well), the top fifty economies in the world by GDP were:
1 US; 2 China; 3 Japan; 4 Germany; 5 France; 6 United Kingdom; 7 Italy; 8 Russia; 9. Spain; 10 Brazil; 11 Canada; 12 India; 13 Mexico; 14 Australia; 15 South Korea; 16. Netherlands; 17. Turkey; 18. Poland; 19. Indonesia; 20. Belgium; 21.Switzerland22. Sweden; 23. Saudi Arabia; 24. Norway; 25. Austria; 26. Taiwan; 27. Greece; 28. Denmark; 29. Iran; 30. Argentina; 31. Venezuela; 32. South Africa; 33 Thailand; 34. Finland; 35. Ireland; 36. UAE; 37. Portugal; 38. Columbia; 39 Malaysia; 40 Czech Republic; 41. Nigeria; 42.Israel; 43. Romania; 44. Singapore; 45. Ukraine; 46 Chile; 47. Phillipines; 48. Pakistan; 49. Egypt; 50. Algeria
No doubt some of this order has change as a result of the GFC, but not by much and this puts Israel 42nd, far from the top ten as you claim. There is no need to exaggerate Israel’s importance or achievements, but if you are going to tell others to get their facts straight, how about you do the same?

Wall of Suspicion

Comment in response to Economist article (March 26. 2010) “Wall of Suspicion”

Good on you Obama. It is about time the US started standing up for its own interests and those of the Western World in the Middle East. This is the only hope that there will be an historic settlement in that region, and a wider one between the Western world and the Islamic world.

The cancer that is the right wing of Israel’s body politic’s hold on Israeli policy means that without American intervention, the renegade behaviour of the Israeli government will continue indefinitely leading to increasing dispair and violence from
Palestinian extremists. It also leaves the moderates within the Palestinian factions nowhere else to go but join the extremists. Obama’s strength now gives everyone hope that there may be a breakthough, from which moderates from both sides can negotiate a compromise.

Obama may prove to be a GREAT President yet. Other posts here comparing him to Jimmy Carter just indicate how out of touch the US Right has become. Also, how silly and cynical the Jewish lobby is in the US: the fact that they thought that the Israeli Government could cheer the US right on and Obama not know about it just smacks of hubris, and then exacerbate it by insulting the vice president in Israel and then again at the national US jewish lobby convention and expect no come back really does show how they have under estimated this President. All power to his future success….

More Than Just a Chirade

in response to the Economist article “More Than Just a Chirade”

NorthLost, you live in a fatasy land if you believe a greater Israel with Jews, Muslims and Christians living in harmony will emerge out of this mess as equal partners. The Jews will never give up the primacy of the Jewish homeland and the dominance of Jews in that homeland.

More likely, this intransigence and outrageous treatment of the US will see the region descend into even greater chaos, with the most likely winner being a nuclear armed Iran, supported by the Arabs (remarkable when you consider the Persians and Arabs are historical enemies and rivals) because they no longer can rely on the US and they basically have nowhere else to go.

If this accured, over time the Israeli state will be doomed by its own intransigence and stupidity, and by the overwhelming demographics of the region. They only have themselves to blame. Is the radical settler movement really worth this cost?

More Than Just a Chirade

in response to the Economist article “More Than Just a Chirade”

How the apologists for Israel can bare-faced say Israel wants peace when this sort of behavior is not only tolerated but encouraged is beyond me. Why doesn’t the US use the undoubted economic muscle over the Israeli state to extract more acceptable behavior. Obama must surely now see that his softly softly approach has not worked in Health care, in climate change, on Iran or on Afganastan.

Nor will it work on a middle east settlement. Sure the Israeli lobby on Capitol Hill will bluster and carry on, but Obama at the moment on a lot of these issues seems to be expending political capital for very little political gain. Better to be decisive and accept you will cause a melt down with the vested interests, at least you will then be seen as being decisive, as well as right on your side in standing up to those who wish to thumb their noses at the US to America’s and the Administration’s considerable cost.

Reasonableness will not work with either side in the Middle East. The attitudes are too well entrenched, and the behaviors too extreme. Strong decisive action backed up with the full use of political and economic power is the only way to achieve a breakthrough. And all sides need the understand that this sort of outrageous behavior as outlined in this article will not be tolerated and will have consequences for those who perpetrate it.

The US would not tolerate this sort of “two figures in the air” to it from ANYONE else. They should not from Israel, otherwise others will decide they can do what they like to the world’s superpower with considerable cost to American power and prestige, and indeed to the safety of the entire Western world.

Does Mossad really make Israel safer?

Comment in response to Economist article “Does Mossad Really Make Israel Safer?

Oh and by the way Tzatz, the so called Clinton solution for the Middle East settlement was no solution at all. The Arabs could simply not accept such an arrangement where it was so biased towards Israel, kept a lot of the settlements in place, and had no real solution to the dilemma about Jerusalem. If that is what you call a comprehensive settlement, then you really are condemning yourself to continuing hostilities.

A Deadly Raid

Comment on Economist artcle (31 May, 2010) “A Deadly Raid”

Until both sides realise that incidents like this will continue until there is a peace deal, this situation is unavoidable. Israel continues to believe that a country with a population of 5 million can use military force to suppress 100m plus around its borders.

The only solution is to stop the settlements, withdraw to the pre 1967 borders, and make peace with the whole of the Arab world. Then have this supported by a million plus troops from UN peace keepers paid for largely by petro dollars, and allow Palestine (Gaza and the West Bank) to develop peacefully into a low cost economic haven right in the middle of the middle eastern powers.

Heaven forbid, Israel may well get on with their neighbours very well, share a common prosperity, even eventually participate in a middel eastern common market. The region could then become a force for good in the world rather than be the reason for most of the world’s conflicts between islam and the West.

How Israel Plays into Hamas’s Hands

Comment on the Economist article (4 July 2010) “How Israel Play’s into Hamas’s Hands”

Very interesting article. Why does Israel seemingly never understand that people will always eventually find a way around repression. If you repress them for long enough, and often enough, you will never get their cooperation and support. Repressing the people of Gaza is causing the opposite effect to what they presumably want. As the article points out, it is not only funding Hamas, but it is allowing them to rebuild the Gaza in their own image which will make it very difficult to un-wind. Without the cover of the blockade, and from it the thriving Hamas controlled black-market, this would not be possible. They are driving the Gazans into the hands of Hamas by their own actions – where else can they go?