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

How China’s Economy Must Change


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.

May 28, 2012 at 09:02

The Diplomat had begun with saying that the average Chinese has 1/10 that of the average American. Then it says China has excess capacity? Should that 1/10 increase to 5/10, all that supposed excess capacity would go down the drain. China does not have enough quality infrastructure to accomodate increasing levels of urbanisation. Wait a decade or so, after the real estate bubble bursts, all the new middle classes would immediately buy up the empty apartments and China could reach the amount of urbanisation of South Korea.

Frankie Fook-lun Leung
May 28, 2012 at 04:42

China’s economy has done excellently for the last 30 years, doing the catching-up game, from a poor country to a manufacturing power. For the next 30 years, if she wants to become a technology and financial driven power, I have big reservations. Her political system and educational system do not allow room for further development in that direction. Just watch. Don’t give me that chauvinistic, Maoist, Overtaking Britain, catching up USA bull-shit.

May 20, 2012 at 12:55

“But what he failed to realize – and what Mao understood – was that unchecked capitalism produces social division.”
C’mon guys! You can do MUCH better than that! deng went to extraodinary lengths to warn the Chinese people of this downside to the experiment that they were about to undertake. Dent, too, was a student of history and knew his Marx. He even reduced his warning to homely sayings that rutal Chinese would understand: “When you open the windows, some flies and mosquitos also get in” etc.
So the past 35 years have seen the world’s most equitable society descend the GINI tables to the level of Brazil today–though the USA is in hot pursuit down the tables, too, and should not be underestimated).
The Chinse people, having been amply forewarned, have maintained and even increased their support for and trust in the CCP to a level unknown in the West: 85%–95% according to Pew, Edelman, and Harvard.
Meanwhile the Party has begun to rein in the bronco of inequality. This year, for the first time, each provincial governor must begin reporting his GINI scores and advancement will now figure in progress in this area.
Onve the government has the data it will present it to the people and begin to implement income-balancing policies, probably through taxation–another reason why they admitted a billionaire to the Standing Committee this year. His voice will speak loudly to his fellow capitalists when the time comes.

John Chan
May 18, 2012 at 22:03

Of course, constructive criticism should be welcome, but in the last 200 years, Chinese has learnt that whenever a westerner (including the Japanese) said it is good for China it is a blade on China.

Lao John
May 18, 2012 at 15:53

First Advisor:

Remember your comment in three or four years time. China will be unable to take such much-needed reforms because it’s almost impossible to change the status quo when the status quo still manages to produce massive gains for those in positions of power and positions of privilege. Sadly it’s all starting to look a bit inevitable these days.

Frankie Fook-lun Leung
May 18, 2012 at 01:53

The problematic issue is not just economic reforms that along. How does China’s political structure adjusts to those economic changes? For example, the land transfers from government to private developers have produced corruption and social unrests. The government cannot just suppress them since they will become very widespread. Should the government’s muzzled media stop reporting them and pretend they do not exist? The government is totally incapable of putting out the fires.

Frankie Fook-lun Leung
May 17, 2012 at 01:47

your article reminds me of what Lee Kuan-yew once said: every time a foreign journalist gives me advice on how to govern my country, I decline. I don’t think Chinese leaders listen to foreign experts to tell them how to change their country. China will grope to find the solutions her own way, despite she sends so many overseas for education and observation. Like Deng Xiao-ping said: stepping on the stones one after the other when crossing the stream.

May 16, 2012 at 20:21

Apart from all this, the real problem with China is its aging population. Median age of China is almost equalient to that of countires of developed world but with almost 10 times less per capita.
China is actually in great trouble due to demographic problem. The benefit of avoid 200 million mouths should have been supported by massive automation and much more rapid and equally destributed wealth generation. But despite every achievement, the already created demographic problem will outrun the benefit of the one child policy.

First Advisor
May 16, 2012 at 17:25

Naturally, a Japanese news site will focus on China-bashing. Naturally, Americans and Canadians will be totally biased against an extremely competent competitor. Naturally, such bias will manifest itself in absurd hyperbole and exaggeration, until an intended thoughtful analysis becomes merely humor. I pity the people who take this trivial nonsense seriously. Silly propaganda isn’t worth anyone’s time or attention.

May 16, 2012 at 10:13

Mao 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.”
Deng failed to realize – and what Mao understood – was that unchecked capitalism produces social division.
But who was the greatest leader of China?There is little doubt that Deng is the winner.
The present problems should be the responsibility of the present CCP leadership.

Frankie Fook-lun Leung
May 16, 2012 at 09:00

It is easier said than done. China in 2012 is different from China 1980. Now the powerful interests are Intertwined with wealth. Not like the 1980 every one was poor and they had nowhere but up to go. Now those who have reaped a lot of dole don’t want to give up. Even the government cannot implement measures so easily.

May 16, 2012 at 05:04

The authors can follow up with another article on China’s SOE vs SME – current dilemma and what and how ‘Reform’ can help. Also, some statistics are needed to backup what they said (5% exception or 75% problem).

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