China: Year of the Three Big Headaches

Laurence Brahm (Political Economist, founder of Shambhala Foundation)

This year may represent a crossroads for China. Last year's trade volume and foreign exchange reserves reached historic highs - US$1.4 trillion and US$1 trillion respectively - and presented China's newest generation of leaders with some new equations.

They face two economic problems with potentially explosive social impacts just a year before the Beijing Olympic Games. First, the income gap between the mainland's haves and have-nots is more than three times the average in other developing countries. Second, Beijing's inability to control the rate of growth shows that the macro-economic control mechanisms relied on by the previous administration no longer work.

Retooling the mainland's economic structure, so that it's driven by consumption rather than exports, may be the key challenge that Premier Wen Jiabao faces this year if he is to assure the sustainability of China's economic model.

People in the street take a raw, practical view, reflected by the popular saying: "People cannot [afford to] see a doctor or receive education, and we have no place to live." Those are the three basics than any government - socialist or otherwise - must provide if it is to retain power.

That popular saying suggests mainland society is far from harmonious. Since President Hu Jintao is promoting social harmony as mainland China's new economic and social ideology, he has his work cut out for 2007. That is because the Beijing Olympics will offer mainlanders an unprecedented opportunity to stage social theatrics for an international TV audience if they are not adequately harmonised by then.

Instead of former president Jiang Zemin's "three represents", people are talking about Mr Wen's "three big headaches": controlling an excessive property boom that provides no housing for the poor; establishing broad-based medical services for what will be a rapidly ageing population; and providing education for young people - who will have to compete with other regional economies that the mainland can no longer undercut with cheap labour.

While China's property prices continue to skyrocket, the provision of medical care and education are in free fall. The two problems are intricately linked. Waiting lines to see doctors in any hospital can be a day long. Doctors are overworked, overstressed and underpaid, making the profession undesirable.

China can deal with the impending pressures of its rapidly ageing population only by comprehensively restructuring its medical-care system - probably involving some return to socialism. Further, the greying population will leave the mainland without enough cheap labour in 20 years. That means it will have to compete with the world as a hi-tech - not low-cost - labour provider.

But the education system, still locked in both Confucian and communist models, is not up to the task. This adds weight to the view of South Asian economists that India will overtake China in the coming decade or two.

So 2007 will be the year when economists start asking whether the mainland's hyper-economic growth model, driven by exports and infrastructure projects, has peaked. For the first time, the think-tanks that feed ideas to top leaders have begun questioning the model's sustainability.

Driven by such concerns, the Communist Party's Central Committee Economic Working Group met late last year to discuss remedies. They managed to produce only the most obvious suggestions, such as that growth rates need not be so high and that the quality of life should improve.

Achieving it this year with slogans alone may prove difficult. Local governments are still fixated on high-growth targets: career promotions and the mechanics of corruption depend on rapid growth. It usually involves spending on property or the construction of infrastructure, perpetuating Beijing's headache of imbalanced growth.

Mr Hu ended last year with a demonstration of toughness: he sought to rein in local government excesses by purging Shanghai party secretary Chen Liangyu and weeding out his cohorts. But the effects of combating corruption may be limited, as local officials see it as a purely political purge.

One solid new programme planned for 2007 is the New Village Movement - xin nongcun yundong. Despite its retro- socialist name, this scheme simply involves basic infrastructure funding to connect remote villages with decent roads. Local road networks will offer income to villagers participating in the construction. The easier transport of goods will help improve rural lifestyles. But local corruption, invariably connected with such projects, may also be stimulated.

Will the New Village Movement promote rural social harmony? Or will people just use the new roads to leave the countryside - where corruption is even more intolerable than in cities - in their quest for urban employment?

(Originally appeared in the January 4, 2007 issue of South China Morning Post in Hong Kong, reproduced here with permission.)