China’s Communist Party has overseen an economic miracle over the past 20 years, but they are now facing the consequences of becoming the fastest growing economy on the planet.
With China’s GDP now standing at US$7.3 trillion, which is five times more than 10 years ago, it is now hot on the heels of the US. Just a decade ago it was sixth behind not only the US, but Japan, Germany, the UK and France. A recent McKinsey report predicted that China will overtake the US in the 2020s. But what happens then?
The drive to be the biggest economic power in the world has been a unifying power for the people of China, who have had to cope with the rapid urbanisation and a growing poverty gap, between the haves and the have-nots.
Only 20 years ago the majority of the country was on the same wage, but raising living standards and promoting competition between the State Enterprises has left some behind. If China is to continue its astonishing growth it needs to take care of these people, it needs a proper social welfare system, one that includes a proper pension and healthcare.
The new leadership urgently needs to eradicate corruption as well, or it will face social unrest, something may be exacerbated by the increasing poverty gap.
While the Chinese Communist Party created an economic miracle, they also destroyed old safety nets provided under the planned economy. When the economy was growing at double digit, the problem was not as acute as when the economy is slowing down as it is now. The new leaders now have to face up to these problems, which the old leaders managed to avoid.
The Government has to re-focus its workforce. It no longer has cheap labour and the new middle class are demanding high quality goods and if China is not careful that vacuum will be filled by foreign exports.
The Government needs to start a new round of policy reforms ranging from fiscal, monetary to industrial restructuring to stimulate domestic private consumption. It also needs to shift its focus to high value added and knowledge intensive industries.
For example, the government has recently raised the threshold of personal income tax to increase disposable income among China’s middle and lower income groups and has set an inflation rate of four per cent for this year.
China has always had to be innovative because they do not have many natural resources, unlike the USA where they are blessed with so many. China has to come up with creative answers to solve the social and economic problems the country is facing.
As long as living standards continue to rise for its people the Communist Party will continue to keep favour with the people. The western world is slightly naïve in thinking China’s political reforms have not been done properly and made only very small steps, but actually they have made a huge amount of policy reforms.
If the Government policy was rigid the economy would have run out of steam and the one-party system means they can be very responsive and introduce reforms quickly. Any policies that are not good they quickly change them.
China needs to show how quickly it can move to keep its economic boom going and keep its people on side by continuously improve their standard of living.