How China’s Economy Must Change
Image Credit: Lyle Vincent

How China’s Economy Must Change

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Mao Zedong, China’s “Great Helmsman,” was a keen student of history. It was for this reason, perhaps, that he was able at times to prognosticate with uncanny accuracy. He once predicted that “the natural forces of capitalism are about to stir among China’s farmers. If these forces go unchecked, society will become polarized. In the end, both the poor and the newly rich will become discontent.”

Mao was speaking, of course, about an economic dynamic transferring from one class to another, for capitalism was then, as it is now, nothing new to China. It has been part and parcel of Chinese culture for centuries, carrying the Celestial Empire through the cycles of production and consumption over several dynasties. It continued into the Communist era with only a relatively short, but very turbulent, interruption.

After Mao’s attempts to curtail private, for-profit ownership turned disastrous, his successor, Deng Xiaoping, set about to revive it under the equivocal epithet “Socialism with Chinese characteristics.” Deng allegedly proclaimed that “to get rich was glorious.” He felt that a socialist state could safely harness the benefits of capitalism, and that communism might work if everyone first got wealthy together. But what he failed to realize – and what Mao understood – was that unchecked capitalism produces social division.

After decades of headlong growth inaugurated by Deng’s reforms, a question once thought consigned to the pages of history after the Great Leap Forward and the Cultural Revolution has come back to haunt China’s communist leadership. Are capitalism and socialism really compatible, especially in a country with a colossal population and comparatively few resources? The answer seems to be emerging with alarming clarity as the gulf between China’s “classes” grows wider and more pronounced.

The most recent global financial crisis hasn’t helped. Throughout it, China has played a stabilizing role in the global economic system, thanks to the concerted effort of a centralized government willing to stay a pragmatic course. While some economists boldly predict that China’s growth engine will pick up and continue as before, there are signs that it may be running out of steam. If it does, the Chinese “economic miracle,” and those carried by it, including millions of poor migrant workers from China’s countryside who rely on factory jobs for income, are about to drift into uncharted waters.

For decades, China has built its economic strategy based on four pillars: exports, foreign direct investment (FDI), fixed-asset investment and domestic consumption. Of these, exports are central. They draw in FDI and support investment in fixed assets and domestic consumption. But exports have slowed dramatically and there’s mounting evidence that a fundamental change is under way.

China has long been inclined to regard itself as self-sufficient. This attitude frustrated British merchants when, in the 18th century, they made early attempts to establish trade and diplomatic relations with Beijing on an equal footing. The Qing court liked to believe that Western nations had little, if anything, to offer that China needed; it held the view that it granted trading rights only as a mark of favor to tributaries. China today has comparatively limited natural resources to support a population of its size. Foreign trade on a large scale, once regarded with distain by Qing mandarins, has become vital to China’s well-being, if only to sustain its massive importation of food, energy and raw materials.

To keep exports moving to its biggest customers – North America and Western Europe – China knows that two basic conditions have to be in place. First, Chinese goods must be cheap. Second, Western consumers must have disposable wealth to buy them.

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