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China’s Next Leap Forward: From Comrades to Consumers

Chinese leadership has hinted at greater economic reforms in store, with freewheeling Guangdong province as the model.

By Steve Finch for

On June 20 of last year, two and a half months after disgraced former Chongqing Communist Party Chief Bo Xilai was dropped from the Politburo, another member of China’s elite 25-man decision-making body was all smiles in the southern city of Dongguan.

During a tour of the bustling factory city, one of the most overt symbols of China’s experiments with capitalism thus far, the then Guangdong province party chief Wang Yang waxed lyrical about his plans to tackle the province’s spiraling crime and economic malaise.

On the front page of the local newspaper the following day, Wang appeared opposite a table lined with bundles of 100-yuan bills, drugs, a handgun and carefully aligned machetes – the unsavory by-products of Guangdong’s recent rush towards prosperity. “Wang Yang strongly supports the ‘three crackdowns, two developments’,” read the headline in the Dongguan Times.

Despite a new campaign produced by the Discovery Channel in February, designed to rehabilitate the city’s unsavory image, Dongguan remains a by-word for crime, vice and everything bad associated with China’s manufacturing-led boom.

With little to offer except hordes of underpaid workers – the city’s population ballooned from 1.8 million in the 1980s to more than eight million today – Dongguan finds itself bankrupt, reflecting a wider troubling trend. China’s local government debt nationwide stood at 10.7 trillion yuan, about 27 percent of GDP. Meanwhile, many overseas investors are leaving for new, less expensive pastures.

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Chen Sheng Fei, a mother of two who moved to Dongguan from southeastern Hunan province in 2007, left her job at a furniture factory in early March. She told The Diplomat that finding a new, decent employer is difficult.

“There are factories here that break the law, companies which never mention things like social welfare,” she said. “Too many companies here are bad.”

Despite its developmental woes, Wang remains the leading advocate of what has come to be known as the “Guangdong model” of economic liberalization, based on high growth and private enterprise. His recent career has been viewed as a litmus test of just how far the new generation of Chinese leaders is prepared to go with much-needed economic reforms.

Whereas Bo, a leading proponent of the neo-socialist “Chongqing model”, focused on social safety nets and state-owned enterprises, was disgraced and removed from office in the months leading up to the recent power transition, freewheeling Wang was made third vice-premier. His rise has only gone so far, however. Wang was not elevated to the all-powerful Politburo Standing Committee as many expected. According to some analysts, Wang’s limited rise was a sign that his radical agenda of major structural economic reforms remains in vogue in Beijing – though only to a degree.

As the latest generation of Chinese leaders begins its decade-long rule, speculation has focused on just how far Beijing may go in overhauling the country’s cautiously capitalist economic model. Despite initial grumblings that the leadership shake-up was not all that radical, there are growing signs that wholesale Wang-esque changes – including more focus on free markets, quality enterprises over quantity and greater worker wellbeing – will form the backbone of China’s blueprint for another economic leap forward.

“China will sustain relatively high economic growth but not super-high economic growth,” President Xi Jinping told delegates at the Boao business forum on the southern Chinese island of Hainan earlier this month. “It does not mean we cannot maintain economic growth at a very fast pace, but because we don’t want it anymore.”

Whether or not you believe GDP trends are entirely Beijing’s choice – growth was 7.8 percent in 2012, sluggish by its own high standards – China is clearly moving away from low-wage industrial output towards a more balanced economic model.

At the start of April, the National Development and Reform Commission unveiled plans to regenerate 25 municipalities and capital cities and 95 prefecture-level cities, which were once part of the industrial base but are now intended to form the foundation of the new Chinese economy. Expanded from a smaller plan announced 18 months ago, this mammoth undertaking will be funded by bond issues and huge capital investment until 2020 in places like Shanghai’s Minhang District, home to numerous manufacturers including U.S. firm Alcoa, the world’s third largest aluminum producer.

“The next 10 years is about consolidating and expanding the revitalization of northeastern China and other old industrial bases, an outcome of an important period [for the Chinese economy],” the NDRC said in a statement announcing the plan.

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China hopes high-technology industries will account for 17.8 percent of production and service 45 percent of output in these cities by 2017. Further, it plans to cut water consumption by nearly one-third and energy by 18 percent in a nod to raising the quality of its industries and reducing pollution.

A week after the NDRC announced the radical overhaul of the country’s manufacturing base, trade official Song Heping told reporters at a news conference that China aims to boost imports amid a total recalibration of trade, in a bid to reduce the country’s reliance on exports.

In 2011, foreign countries filed 69 trade remedy probes against China, according to commerce ministry figures. In 2012, that number increased to 77 investigations and the first quarter of this year points to yet more cases in 2013 – 22 such probes were filed by the end of March.

Although China remains concerned over increased bad blood with its trading partners, the key motivation appears to be reducing the potential for external risk factors that could damage China’s economy. Towards this end, currency reforms will be vital.

Last Tuesday, central bank research official Wang Yu indicated further measures to unshackle the Chinese currency as the yuan reached a 19-year high of 6.1831 against the U.S. dollar.

“Market-oriented progress in interest rate and currency exchange rate reform will provide huge opportunities as well as challenges for the country’s payment and settlement system,” Wang was quoted as saying by the state-run China Daily.

With greater convertibility comes increased trade and fewer complaints from the U.S. Federal Reserve over currency manipulation, but also less control – always a fear in Beijing. Yet, further moves to slim down gargantuan state-owned enterprises suggest the government may be overcoming the impulse to micromanage. Perhaps even more significantly, Beijing may be increasingly ready to tackle vested interests.

The government announced a month ago that it would rip apart the Ministry of Railways, an inefficient hotbed of state waste and corruption that has racked up staggering debts of 2.53 trillion yuan (U.S. $405.8 billion).

Former Railways Minister Liu Zhijun was charged with corruption and abuse of power last month in a case that is being viewed as a key test of whether the new guard will take corruption more seriously, another pillar of economic reform.

As a result of changes to the Railway Ministry in the wake of the scandal, the state will oversee administrative matters while the new privately owned China Railway Corporation will manage commercial operations.

An article in the China Daily called the move the end of Communist China as we know it. “The dismantling of the Ministry of Railways is also a farewell to the planned economy,” it read.

If this does indeed mark the ultimate sign of capitalist aspirations from the government, on the public’s side the key test remains whether China’s 1.3 billion people can complete their evolution from pre-Deng Xiaoping comrades to fully fledged consumers under Xi.

In an outlook note at the end of last year, Deutsche Bank forecast that demographic and macro-economic shifts in China would result in a nearly 15 percent rise in real consumption between 2010 and 2020 amid a 20-percent plus drop in real exports. In other words, Chinese are expected to pick up the slack from decreased demand overseas.

To reach its target of doubling per capita income within this decade for both urban and rural Chinese, GDP growth would need to hit at least 7.2 percent for each of the coming eight years, according to analysts at HSBC, an achievable target given that growth estimates for this year and next are expected to be closer to 8 percent.

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“Per-capita income could reach $12,000 by 2020, lifting the status of China to that of a developed country,” reads an HSBC research note on reforms from March.

How this scenario plays out – whether prosperity will trickle down in China without further widening the already chasm-like wealth gap – lies at the core of the current policy debate. Using the analogy of a cake, Wang and Bo have espoused very different views of how to bridge this gap.

In late 2011, just before the scandal engulfing Bo and his wife broke, Wang famously said that China “must bake a bigger cake first before dividing it.” Bo, in response, disagreed: “If the distribution of the cake is unfair, those who make the cake won’t feel motivated to bake it; therefore we can’t bake a bigger cake.”

While there is no doubting the size of the cake Wang helped to bake in Guangdong – among China’s most economically dynamic and wealthy provinces – the socialist dream is all but dead in places like Dongguan.