By Lawrence Katzenstein for Global Risk Insights
The policy initiatives announced by General Secretary Xi Jinping at the 18th Party Congress in 2012 were the most far-reaching since Deng Xiaoping’s Four Modernizations opened China to the global market and private ownership in 1978.
Observers of Chinese actions since the 18th Congress have been particularly concerned with China’s anti-corruption investigation that has led to a series of prosecutions not only against Chinese companies and officials, but also Western corporate icons like GlaxoSmithKline (GSK), Microsoft and Mercedes Benz.
There has also been heightened concern about increases in China’s defense budget and its stridency over territorial disputes in the East China and South China seas.
Radical policy shifts are not uncommon with changes in Chinese leadership
Those concerned with the dramatic changes should recall that both imperial and communist leadership transitions in China were often marked by the imposition of policy diametrically opposite to the status quo.
In imperial times, periods marked by bad harvests, earthquakes and rebellions were taken as a sign that the emperor had lost the “mandate of heaven.” A new emperor taking power, especially after a rebellion, would centralize power over officials who had set up near-independent kingdoms in the countryside. A new court historian would often be appointed as time was seen to begin anew.
After 1949, we saw a similar pattern under Communist Party rule with the nearly dialectical shifts between Soviet-style bureaucratic governance and radical Maoist governance reflected in both the Great Leap Forward and Great Proletarian Cultural Revolution.
The changes of the “China Dream” that were first announced by Xi at the 18th Congress mark a new era. If Maoism was Chinese Communism 1.0, and the Four Modernizations were 2.0, the “China Dream” is 3.0 marked by a new generation of CCP leaders.
How will the Chinese Dream affect those outside China?
This new order is significant because it reflects China’s new global role. The wide scope of these policies will not only affect Chinese citizens but will also have significant impact on international companies and on foreign states. The “Dream” is an amalgam drawn from the current interplay between Western and Chinese ideas.
The campaign is American in origin, since Xi adopted the name and some ideas from a column by New York Times columnist Thomas Friedman. The core concept is of a sustainable version of the American Dream adapted to Chinese needs and resources.
Sustainability is captured not only in Xi’s oft-stated goal of creating “moderate prosperity” for all Chinese, but also in one stated campaign priority of creating a “Beautiful China.” This is further defined as a China that has a clean environment marked by low pollution.
The “Chinese Dream” incorporates four elements:
- “Strong China” which includes a stronger economy, better diplomacy, stronger scientific achievement and a stronger military;
- “Civilized China” which includes equity, fairness and high morals;
- “Harmonious China” including harmony between social classes;
- “Beautiful China” including a clean environment and low pollution.
If the Four Modernizations raised the GDP per capita from $163 in 1976 to $6,807 in 2013, by World Bank estimates, the current goal is to double the GDP per capita to $20,000 by 2020. A key priority is to shrink income inequality across the population. A related goal is to complete the urbanization of China to 70% of the population by 2020.
Western businesses and decision makers should weigh the probability of China’s future actions in accord with this central goal.
For instance, while China’s provocations against Japan can raise anxieties of an escalating conflict this is unlikely. Since the U.S. and Japan are two of China’s five leading trade partners, escalation would lead to slower growth and hurt the GDP per capita.
China’s recent anti-trust and anti-corruption enforcement, even against foreign firms, is a priority because it would enhance market efficiency, return diverted capital to the market, and enhance growth per capita. Equity is an important yardstick for the perceived salience of policies related to the “Dream.”
Income Inequities, Decreasing Growth Rates and Political Instability
The Chinese have good reason to fear instability and disorder. Domestic disorder, including the Great Leap Forward and the Cultural Revolution, wrought havoc with people’s lives. The leadership has reason to be concerned about the current situation.
Rising expectations followed by an economic slowdown, and the relative deprivation of one group observing the growing income of another have often led to instability and revolution.
China has had both conditions developing recently. In the past, high inflation and relative deprivation contributed to worker mobilization during the Tiananmen Square demonstrations in 1989.
While the growth of China’s economy since Deng Xiaoping initiated the Four Modernizations has been exceptional, it has come at a very high price.
Those living in urban areas, at or near the coast, are the major beneficiaries of export-oriented growth and the rise of technology while most of the country is getting by with far less disposable income.
China has had a remarkable growth rate since the Four Modernizations but GDP per capita growth has reached a new low growth rate in recent years. Only 9% of GDP is in the primary sector, meaning only a small amount of wealth is being distributed to the mass numbers of farmers and fishermen. It is hardly the economic equality the Party first promised.
The government has lowered the reserve rate so that banks in rural areas can invest more, but this has not had much success. Greater economic reform is needed.
As reforms go forward, expect to see continued official moral outrage toward the corrupt combined with official assurances for hard workers. Even model workers like Lei Feng from 1962 are being invoked again. Such invoking of earlier communist and patriotic values is designed to garner mass support until reforms yield results. Expect more of the same until then.