View From the Wall

Steady Growth, Comprehensive Restructuring and National Transformation Prospects after the 18th Party Congress

Over the past 30 plus years, China’s economy has been on a high growth trajectory. According to International Monetary Fund (IMF) statistics, from 1980 to 2011 the actual U.S. gross domestic product (GDP) grew 2.28 times larger, Germany’s increased 4.39 times, Japan’s 5.47 while China’s grew by 34.52 times! Although the growth of these developed countries just about quadrupled during the period from 1990 to 2011, the per capita GDP in China grew 25 times larger. During this rapid growth, China’s economic structure underwent a drastic change as well.

In 2011, the total population in Mainland China was 1.347 billion of which the urban population was 690 million while rural areas were 656 million. For the first time, the urban population exceeded that of the rural areas implying that the country has changed from the several thousand years old rural China to an urban China. Over three decades of reform and opening-up, China’s urban population increased from 172 million to 690 million of which 150 million once lived in the countryside. That is the largest population migration in human history; it is three times the European migration to America during the era of American industrialization.

“Within one generation, China has achieved what has taken centuries for other countries to do” (World Bank, 1999). “In human history, never before have so many people in such a short time experienced such rapid improvement in living conditions” (Krugman, 19990). There are no greater words of admiration than these.

However, even at the time of China’s 18th Communist Party Congress, the country’s transformation was not yet completed. Multiple challenges still lie ahead, and the overall risks are rapidly growing. If China does not persist on the path of reform, it may regress and even crash!

In 2011, I pointed out that 2012 would be more than just a new year for China; it would be the beginning of a new era. China would inevitably experience turbulence and risks: an economic downturn, social upheavals and risks for the government. As 2012 now comes to an end, we have seen all of the above. First, China’s economy staged a high dive. From a peak GDP growth of 15%, to 2011’s highest increase of 11% and an average growth of nearly 10% in the past three decades, to a dip in growth of 7%, China is at risk of a hard landing.

Second, this year, from east to the west and from north to south, there were frequent outbreaks of violent, mass incidents. These occurrences in Shifang, Qidong, Shenyang, Yinggehai and other places reflect the fact that the old way of doing things can no longer be sustained.

Third, the government faced many risks. This has been seen not only in various civil incidents and criticisms but also in the breaking news of Wang Lijun, and Bo Xilai’s world-shocking political crisis. These situations indicate that the governance that was effective in the past can no longer be maintained.

To those outsiders who only watch the Chinese news, China is “a blessed country.” However, those who access online public opinions about the nation will see that social antagonism and discontent have reached a serious level. China is definitely a broken countryand in pain.

All of the above, particularly the events of 2012, point to the core issue that China must speed up its transformation. Only then can the nation deal with its crisis and continue to advance. Over the past three decades, China has put on the “red dancing shoes” of change, and economic transformation has brought about huge changes. However, a transformed economy is bound to promote political and social change. At the 17th Congress, there was major consensus on this point, but unfortunately there was not any implementation. Thus, at the 18th Communist Party Congress in 2012, this issue was a focus of attention. I believe it will have a greater global impact than that of the United States’ election. The entire world is watching to see the direction the world’s second-largest economy will take following this recent Congress.

Now, after careful observation, we should be able to sketch a rough outline of the path that China’s development will take in the future. At the economic level, following the aftershocks of rapid decline in economic growth, the latest trends show optimistic signs for China’s economy in 2013 and beyond. Beginning in the third quarter of 2012, China’s economy halted its fall and began showing a successful soft landing as well as signs of economic recovery. GDP and other indexes have shown signs of stabilization and even accelerated growth. The Purchasing Managers Index (PMI) has returned to within the range of economic recovery, indicating that in 2013 China’s economy will improve.

Internally, three factors will continue to drive China’s economy upward. First, the government’s investment in infrastructure will continue to be a strong stimulus. The Chinese government has sufficient financial strength and will not loosen its grip until the economy is in full recovery. Second, China’s real estate has begun a modest recovery in the third quarter and is expected to continue this momentum into 2013. This, together with market-driven strength and the strength from the Chinese government, will boost the economic recovery. Third, the selling off of inventory as a result of the economic downturn will bottom out in 2013; then an impetus to add inventory will emerge. In the external economy, considering the steady rise in global leading economic indicators and the prediction by a number of international institutions of a better economy in 2013 than in 2012, Chinese imports and exports are expected to maintain steady upward momentum. Taken together, China’s economy is expected to return to an 8% growth rate with annual economic growth expected to reach 8.2%.

However, it must be noted that this current recovery is still very vulnerable, and growth must not be too rapid since China’s economy is still subject to drag from the international economy. At the same time, China’s real estate and automobile industries can no longer help boost China’s economy by maintaining a tenfold increase as during the past decade. The macroeconomic policy of the Chinese government to provide stimulus has only limited, diminishing effects. As a result, the Chinese economy’s improvement in 2013 will be weak and mild. However, one should still be thankful that it will obviously have averted a hard landing and a rapid decline as in 2012. The risks of China’s economy have been mitigated to a large extent; one can look forward to medium- to long-term stable growth.

The Chinese economy is still in the stage of rapid, structural, transformation and fast economic growth like that of a growing child. Compared with developed countries with urbanization of 80% or above, China still has a long road to travel. The ineffectiveness of the “globalization/external demand growth mode” led to the crises in the West; China’s “urbanization/internal demand growth mode” still affords a tremendous capacity for growth.

If, after the 18th Congress, the Chinese government can stimulate the vitality of its economy, then it can be expected to enter a new growth cycle with a growth range of approximately 7 to 8%. Furthermore, it can be expected to leave behind its high volatility and enter a period of low fluctuations and steady growth; the Chinese economy will welcome a new, rare, very good season.

The major characteristics of this new season will be the small fluctuations and stability. The target for China’s economic growth, set at the 18th Congress, is for the economy, by 2020, to have quadrupled over the preceding ten years. (Both urban and rural per capita income should also have quadrupled). Assuming that GDP growth in 2013 will be stable at 8%, and if from 2014 over the next 20 years it will drop gradually from 7.5% to 6% achieving the goal of an average annual growth of 7%, then the Chinese economy will have “L-shaped” growth. The advantage of “L-shaped” growth is stability. Therefore, China’s economy will no longer be subject to great fluctuations and can enter a decade of moderate growth.

This growth pattern will greatly enhance China’s national strength. In 2000, the size of China’s economy was two trillion U.S. dollars, equivalent to 1/6 of the United State’s economy. From 2000 to 2010, China’s economy tripled, reaching six trillion U.S. dollars, equivalent to 40% of the U.S. economy. If the Chinese economy in the next decade comes close to a growth of 8%, by 2016 the Purchasing Power Parity (PPP) of China’s total economy will be expected to exceed that of the United States. According to the official Chinese estimate, by 2018 the total Chinese economy, with currency conversion, is expected to exceed that of the United States and will become the world’s largest economy. If China’s economy is growing at an annual low of 7%, by 2020 the Chinese economy will have doubled and reached the 12 trillion dollar mark exceeding the U.S. economy at that time by 60%. At the same time, it will be equivalent to one and a half times the Japanese economy, and four times that of Germany, India, France or Brazil, six times that of Canada as well as 12 times that of Mexico.

China, as such, will increasingly exert an enormous influence on the global economy and be attractive to the world. Undoubtedly, such a time is worth looking forward to. On the other hand, such growth does not happen naturally. It requires breakthroughs in reforms to drive changes that, in turn, will ensure steady growth. In short, for China to achieve long-term steady growth, it must have political and social stability as well as economic success. It also requires full, internal, political transformation. Thus, it needs the implementation of political and social reforms as well as revived public confidence in both the reforms and the future of China.

At present, there is a serious gap between the rich and poor in China; issues such as corruption, injustice and confrontation among different social economic classes have reached their most serious levels since the establishment of the People’s Republic of China in 1949. These are the stumbling blocks to the country’s steady development and prosperity. It is anticipated that the pendulum of China’s policies, which have swung to the left in the past decade with the increasing loss of the country’s vitality, will swing back to the right. To deal with the country’s problems, diffuse the simmering crisis and continue down the path to revival, reforms will be attempted once again. The path China is taking is becoming increasingly apparent since the 18th Congress; it includes an economy that assumes steady growth and a society and politics that become more open. There is no choice; this is the only way forward.

China, after the 18th Congress, has its economy on track for steady growth; its society is becoming more open and its government more transparent. Not only does China’s comprehensive transformation promote the country’s advance, it is also the most advantageous opportunity for China to change as a nation. According to Asia Harvest statistics, the number of Chinese Christians reached 105 million at the end of 2010; however, their influence on Chinese society is still limited. Now, after the 18th Congress, the number of Chinese Christians is expected to continue to climb while the relatively more relaxed environment should raise the quality and degree of their impact on Chinese society. When that happens, it will be the first time in history that China’s comprehensive change of its systems and development model converges perfectly with the morality based on the life of Christ and inward transformation of the individual. Perhaps China, as a result, will move towards the well-awaited season of the “Change of the Cross.” Chinese Christians will usher in the most important, and best, season for China’s national transformation as well as for Kingdom ministries.

In 2011, I issued a warning: “Landing, please fasten your seat belts.” Now, however, the aircraft is beginning to enjoy a smooth flight; with clarity I hear a voice from above saying, “Come, my darling, my beautiful one. Rise and go with me” (Song of Songs 2:10).

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ZHAO Xiao, PhD, is the founder and chairman of Cypress Leadership Institute, a former Macro Strategy Department Chief of SASAC Economic Research Center, a professor at the University of Science and Technology in Beijing and has done research for various entities including Harvard University and Gordon-Conwell Theological Seminary.View Full Bio