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After COVID-19, Can China Still Become ‘Moderately Prosperous’?

Reaching “xiaokang shehui” status is a crucial goal for the CCP. Is it still achievable?

By Montijn Huisman for
After COVID-19, Can China Still Become ‘Moderately Prosperous’?

A worker wearing a protective face mask to help curb the spread of the new coronavirus holds a temperature scanner as she waits for customers at a clothing store in Beijing, May 28, 2020.

Credit: AP Photo/Andy Wong

2020 was supposed to be a triumphant year for China and the Chinese Communist Party (CCP). The country was set to finally transform into a xiaokang shehui – rendered in English as “moderately prosperous society.” Gross domestic product (GDP) and disposable income would be double what they were in 2010, and no Chinese citizens would be living under the national poverty line of 2,300 RMB per year at 2010 prices ($340). Before the Chinese Spring Festival, China’s prospects of achieving xiaokang — “moderate prosperity” — seemed good. To reach its GDP goal, the economy would have had to grow by around 6 percent this year. Poverty alleviation was similarly on track. By the end of 2019, there were still 5.5 million people living in poverty according to the National Bureau of Statistics (NBS). Since 11 million were lifted out of poverty in 2019, completely eliminating poverty this year would be an achievable, albeit still difficult, task.

Enter COVID-19. The epidemic-turned-pandemic paralyzed the Chinese economy for a three-month period and resulted in a historic contraction of GDP by 6.8 percent year-on-year in the first quarter of 2020. Nonetheless, in his annual report to the National People’s Congress (NPC) last Friday, Premier Li Keqiang projected confidence. While the premier announced that, for the first time in 30 years, China will not have an annual GDP target, he reiterated the leadership’s commitment to the long-held goal: “We will win the battle against poverty and achieve the goal of building a moderately prosperous society in all aspects.” However, faced with the pandemic, what kind of xiaokang will the government be able to deliver, and what will look like for China’s most vulnerable, who are hit hardest by the crisis?

To answer these questions, it is important to understand that xiaokang is not one specific target set by China’s current leadership. It was Deng Xiaoping who introduced the concept of “xiaokang shehui” into modern Chinese political discourse, apparently first mentioning it during a talk in October 1979 with Japanese Prime Minister Masayoshi Ohira. Deng later linked xiaokang to a crude policy goal: a quadrupling of GDP and GDP per capita in real terms from 1980 to 2000. Astonishingly, these goals were achieved well ahead of time, with GDP and GDP per capita having grown four-fold in 1995 and 1997, respectively. Xiaokang was frequently invoked by Presidents Jiang Zemin and Hu Jintao during their time in office and has assumed an important role under current President Xi Jinping. Xi has made “comprehensively building a moderately prosperous society” the first of his “Four Comprehensives,” a list of key political goals.

In a sea of propaganda and slogans, including the Chinese Dream, Eight Musts, Three Stricts and Three Honests, Community of Shared Future of Mankind, Two Centenaries, and Four Matters of Confidence, such concepts may appear to lose all meaning. Yet, discarding xiaokang as meaningless propaganda would miss the point. First, while xiaokang is a changeable concept, it is connected to real policy objectives. In the 13th Five-year Plan (2015-2020), the Chinese Communist Party (CCP) outlines that achieving a moderately prosperous society in all respects requires a doubling of GDP and disposable income from 2010 to 2020. Xiaokang has also explicitly been coupled to Xi’s anti-poverty campaign. As recent as March this year, Xi assured the Chinese people that despite the COVID-19 crisis, the government remained committed to “eradicating poverty […] as planned so as to build a moderately prosperous society in all respects.” Second, the CCP’s main source of legitimacy is without doubt economic development. For decades, as the Party oversaw rapid economic growth and a massive fall in poverty, the Chinese people have accepted severe restrictions of political freedom. Grandiose targets and campaigns such as achieving xiaokang have been precisely the way in which the CCP has communicated these developmental successes to the people.

Would it still be possible to accomplish xiaokang before 2021 according to its original formulation? In order to double 2010’s GDP, the economy would need to show strong recovery in the remainder of 2020. Surprisingly, recent signs are positive. China’s PMI expanded in the past two months and exports grew 3.5 percent in April year-on-year. Furthermore, the government announced fiscal measures that analysts say will equal to about 4.1 percent of China’s GDP.

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However, these data belie a much less rosy long-term outlook. A closer look at export data reveals that its recovery stems mainly from increased global demand for medical supplies, which is unlikely to last. A fall in imports by 14.2 percent in April year-on-year underlined weak domestic demand. On top of that, the real extent of the economic damage will become visible only after industries around the world reopen. To double 2010’s GDP, the economy would have had to grow by around 6 percent this year. Given the 6.8 percent contraction in the first quarter and a collapse in demand internationally, that goal now seems impossible. Indeed, the IMF expects growth to fall as low as 1.2 percent this year. By dropping this year’s GDP target, the government has signaled it realizes that doubling GDP this year is unlikely.

Why, then, did Li Keqiang commit so strongly to achieving xiaokang? Everything indicates that the CCP is shifting its focus from quantitative economic growth to socioeconomic development. Liu Minquan, professor of economics at Peking University, says: “whether one has reached the target of xiaokang shehui should not just be about GDP statistics, but should reflect the real improvement in well-being by the people.” The new policy targets announced by the NPC indeed strongly emphasize employment creation and poverty reduction. Specifically, they aim to maintain an urban unemployment rate of 6 percent (its current level), protect living standards, and step up efforts to achieve the elimination of all rural poverty. In his speech, Li explicitly linked these targets to xiaokang. This begs the question, however, if the government will be better poised to stabilize employment and reduce poverty than it will be to promote GDP growth.

China’s official unemployment rate rose to 6 percent in April, from 5.9 percent in March. There has been much debate about the accuracy of these numbers. Some analysts suggest that unemployment could actually have reached 12 percent. Accurately measuring unemployment is always difficult, and the methodology used in China has two important flaws. First, it does not count rural unemployment. This is a legacy of China’s land tenure system, under which all rural residents were allocated state-owned land. Even if these rural residents do not work on their allocated plots, they officially remain rural land-holders and are therefore counted as employed. Second, enormous numbers of rural residents have moved to urban areas as migrant workers. Due to China’s hukou household registration system, migrants that move to urban areas to work officially remain rural citizens.

There are 290 million migrant workers in China, 170 million of whom are rural residents. Even though the current unemployment survey methodology is supposed to ignore workers’ hukou, the survey is bound to underestimate unemployment among rural migrant workers, as they often work in unofficial capacities and change jobs frequently. While the true extent of migrant worker unemployment is hard to measure, reports suggest that significant numbers have lost their jobs. Due to the unemployment survey’s methodology, scores of jobless migrants might not be captured by the statistics, which will prove an obstacle in formulating policies to help this group.

The effects of COVID-19 on poverty will be equally difficult to address. Again, particularly worrisome are the consequences for rural migrants, perhaps the most vulnerable class of China’s workers. According to Liu, the Peking University professor, “The pandemic has and will continue to have a serious negative impact on everyone in the country, but the impact on migrant workers has perhaps been the greatest. Many of these workers have now lost their work because of factory stoppages or shop closures.” Although officially these migrants are land-holders, this is unlikely to keep them out of poverty. There is a severe urban-rural divide in China. In 2019, households in rural areas had a disposable income that was less than 40 percent of that of urban households. Furthermore, as Liu explains, “they do not enjoy the same level of social protection as local residents in their adopted cities. While even some of the local residents may be going through a tough time, one expects the effect on migrant workers to be even greater.” It seems inevitable that, precluding targeted government support, many of these migrants and their dependents will fall into poverty.

Although the government has made employment its top priority, some analysts have argued that the focus lies too strongly on urban areas. There are reasons why the CCP should be concerned with urban dwellers. A record number of university students will graduate this year and the real estate market depends on urban households. More importantly, the biggest potential threat to social stability, in the eyes of the Party, comes from the urban middle class. An added problem is actually finding those at risk of falling into poverty. China has dibao, an unconditional cash transfer targeting those living under the national poverty line. But research suggests that in reality, less than 15 percent of eligible rural households actually receive the benefits.

The way in which COVID-19 affects China’s economy and people is by no means unique. Around the world, it is the most vulnerable who are hardest hit. On the bright side for the Chinese people, by tying its legitimacy to the socioeconomic development of a xiaokang shehui, the Party now has no other choice but to find ways to protect the living standard of the Chinese people. Moreover, the CCP has proven that in the past that it has been able to help the poor despite economic shocks. The number of rural poor was reduced by 120 million over the 2005-2010 period, despite the intervening global financial crisis. The number of poor is now much smaller, but this also makes it more difficult to target them effectively.

Either way, the government will doubtlessly find a way to declare victory this year. Last week, state media published a year-old speech by Xi, in which he said that China “basically achieved the goal of building up a comprehensive well-off society.” Yet for the Chinese laborers losing their jobs due to the COVID-19 pandemic, xiaokang shehui now might seem awfully far away.

Montijn Huisman is a Dutch researcher and writer interested in China’s political economy, international economics, and global development. He currently works for the Institute of New Structural Economics in Beijing. Montijn graduated from the London School of Economics and Peking University’s Yenching Academy.