China’s exports don’t fuel boom

Marking the 90th anniversary of the Chinese Communist Party last Friday, President Hu Jintao told colleagues the party’s survival depends on the twin pillars of economic growth and social stability. While China undoubtedly needs both for the party to remain in power, the dilemma for the country’s leaders is that the way China achieves rapid economic growth is increasingly the reason behind growing instability in Chinese society. In fact, loosening rather than tightening its grip on power is more likely to ensure that there is harmony rather than turmoil throughout China.

The key to understanding and resolving the dilemma lies in the nature of the Chinese political economy. The common wisdom is that China’s leaders are doing a magnificent job building prosperity for the nation’s citizens. After all, since Deng Xiaoping’s reforms in 1979, Chinese gross domestic product (GDP) has grown more than sixteenfold. But it is how China achieves growth and who benefits from the growth that really matters. China has pursued a model of investment-led state corporatism since the mid 1990s. This was cobbled together after the 1989 Tiananmen Square protests to preserve the economic power and relevance of the party. But it is the country’s state-led economic growth model that puts social stability at risk.

Many outsiders are unaware that the greatest contributor to Chinese growth since the 1990s has not been net exports but domestically funded fixed investment used to buy machinery or construct buildings and infrastructure such as roads and bridges. For example, this propelled 40 percent of GDP growth in 2008, 90 percent in 2009 and around 55 percent in 2010.

The reliance on fixed investment is the highest of any economy over the past century. But it is not just the emphasis on fixed investment that is striking. Where the capital goes is also all-important. Although state-controlled enterprises produce one-quarter to one-third of the country’s output, they receive more than three-quarters of its capital, and the figure is rising. Revealingly, state-controlled enterprises received more than 95 percent of the 2009-10 stimulus money. The Chinese state sector owns at least two-thirds of all fixed assets in the country. In contrast to the 130,000 state-owned enterprises, the tens of millions of private-sector firms and businesses are left to fight for the scraps.

Tellingly, China’s 50-million- to 200-million-person middle class (depending on how we define the term) is the strongest supporter of the party, which is about 80 million strong. These elites comprise the fastest-growing groups wanting to become party members, almost a quarter of whom are professionals and skilled workers, a third students, and another third successful businesspeople. Joining the party has become a lucrative career move. By controlling the most important industries and the bulk of the country’s capital through state-owned banks as well as by overseeing an extensive system of awards, promotions and regulations, the Communist Party continues to control and dispense a dominant share of the country’s most valued economic, professional and social opportunities.

Meanwhile, about 1 billion people are missing out on the fruits of prosperity. The country’s “bottom billion” are outsiders to China’s state-led model of development. They have little prospect of rising up and suffer under the yoke of frequently corrupt and incompetent rule by China’s 45 million local officials.

For example, according to a 2005 Chinese Academy of Social Sciences report, more than 40 million households have had their lands illegally seized by corrupt and unaccountable local officials in a privileged position to make good from the country’s booming property market over the past decade. In the 1990s, poverty alleviation slowed dramatically, and since 2000, the numbers of those still in poverty actually have doubled in absolute terms. The net household incomes of more than 400 million people have stagnated or declined over the past decade, while the wealth of the state sector grows at 20 percent each year. In one generation, China has gone from being the most equal to the most unequal country in all Asia.

It is no wonder that, according to official figures, there were more than 130,000 instances of “mass unrest” in 2009, rising from around 60,000 in 2006 and just a few thousand in the late 1990s. China spends more than $100 billion on the People’s Armed Police (PAP), which is more than its official budget on national defense and the People’s Liberation Army. Separate from the normal police forces, the PAP is an 800,000-strong military-trained unit specifically created and deployed to quell internal unrest. That means that the goal of producing a “harmonious society” is becoming more rather than less difficult. Party leaders confront the paradoxical reality that as GDP grows, discontentment and instances of social unrest rise even more quickly. In other words, simply achieving rapid GDP growth is not solving the problem.

The obvious way out of the dilemma is for the party to take its hands off the levers of economic power in the country. If it did so and allowed more resources to flow to the tens of millions of private businesses in the country, GDP growth would be more likely to benefit the majority rather than an elite minority.

This would mean the party losing its privileged and dominant role in Chinese economy and society, but it would help build a more harmonious society and with it improve the chances of the party remaining in power when it celebrates its 100th birthday in 10 years.

Dr John Lee is a research fellow at The Centre for Independent Studies.