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

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