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12.10.2017 - 09: 24

The age of obstacles

What needs to be overcome by China to achieve the "first hundred-year goal"

18 October in Beijing will open the XIX Congress of the Communist Party of China, which will determine the composition of the leadership of the country for the next five years. Between the various factions within the Chinese elite there is a fierce undercover struggle, but whoever is at the helm of the second world economy and Russia's main trading partner, he has to solve a number of vital tasks. On the eve of the congress, Kommersant asked leading world and domestic Sinologists to single out seven problems that the new composition of the Chinese Politburo will have to face, whoever enters it.

In the penultimate year of the next political five-year plan (2017-2022), PRC should, as planned by the architect of Chinese reforms, Deng Xiaoping, achieve the "first hundred-year goal": build a "small prosperity" (xiaokang) society on the 100 anniversary of the founding of the Communist Party (1921 year). Thus, the PRC will approach the goal of building "socialism with Chinese characteristics" and fully recover from the consequences of the "century of humiliation" (1842-1949). There was never a concrete bar, but the threshold, logically, was already reached: a pauper and backward China remained in the distant past. The country boasts a nominal per capita GDP of $ 8,1 thousand (Russia - $ 8,9 thousand), a human development index for the 0,738 score (Russia - 0,804) and, according to these indicators, belongs to the world "middle class".

Nevertheless, all the experts interviewed by Kommersant agreed that China will have to pay a considerable price for its successes. Over the past 30 years, the country has accumulated not only financial and human capital, but also economic, social, political and environmental problems. They, like the successes of the PRC, are unprecedented in scale. China's domestic debt exceeds 300% of GDP. 20% of agricultural land and 80% of groundwater are contaminated and unsuitable for use. The "demographic dividend" is exhausted: the maximum of the working-age population was reached in 2011 year (925 million people), and since then their number has fallen and the population is aging. Reflecting the inequality, the coefficient Gini reached in 2016 46,5 points, and according to this indicator, "socialist" China has overtaken the majority of the capitalist countries of the planet.

The past generations of Chinese leaders have borrowed financial, human and natural resources from the future, and the current leadership, which will be formed following the results of the 19th Congress, will have to begin to repay debts.

Reform of the economy

Despite the impressive growth - 6,7% in 2016, the main problem for the authorities of China for the next five-year period will be economic reform, say the experts interviewed by Kommersant. Based on investment and export, the model works worse, and soon and completely ceases to provide economic development. "It is unlikely that it will be possible to ensure the loading of production capacities at the pre-crisis level in present-day conditions," Raisa Yepikhina, a researcher at the ISAA MSU, told Kommersant. "The task of closing and merging the companies is on the agenda." From 2001 to 2016 year production, for example, steel in China has grown from 152 million to 805 million tons per year, up to 50,3% of world production of this product.

Global consumption of steel in the meantime reached its peak in 2014 and since then has been stagnating, and in China itself it is falling. 2015 year became the worst in the whole history of the industry: Chinese steel companies registered losses of 100 billion yuan and remained only thanks to state support. The reason is in the crisis of overproduction: all the basic infrastructure in China itself is already built, the figures for economic growth in developed and many emerging markets (Russia, Brazil, South Africa) remain low, and there is simply nowhere to put steel.

Since the end of 2015, China has announced that it will conduct "reform proposals". It meant the closure in the next five years of surplus production, mainly coal, steel and cement, as well as a reduction, according to various sources, from 1,8 million to 6 million of their employees. It is also expected to blow off the housing bubble, which made the apartments prohibitively expensive and closed the way for many Chinese people to start their own housing. Other components of the reform were the reduction of the debt burden of large firms, the reformation (consolidation) of state companies and the promotion of small and medium-sized innovative production.
"Another problem is low consumption, which is directly related to low incomes of households," Professor of Finance at Peking University and Carnegie Center expert Michael Pettis told Kommersant. "Earlier growth was provided by investments, but now the country is reinvested, further investments are a waste money". According to the expert, at the moment the reforms are very slow. The resistance of regional officials and the inertia of the established structure are hindered, to which for three decades everyone has become accustomed. The authorities of the regions continue to build useless steel mills, build deserted residential blocks and lay empty ten-lane highways to show their bosses economic growth. "The first sign that China is seriously embarking on the restructuring of the economy will be the abandonment of the race for GDP growth figures," Mr. Pettis believes. "To do this, we need to change not just the model, but the whole system of motivation for officials."

Domestic debt

The second most important issue surveyed by Kommersant experts was the domestic debt. In May, the rating agency Moody's for the first time in 30 years downgraded the country's credit rating, indicating debt as one of the main problems. Indeed, the serious problem became after the global financial crisis 2008-2009, when the state announced an infrastructure incentive plan and distributed to the local governments 4 trillion yuan ($ 568 billion at the rate of that year) loans. The program allowed China to maintain the pace of economic growth, but created a huge mass of bad debts: officials thought about how to quickly spend the money of the center, and not whether the plants and factories built will generate revenue. Since then, the pyramid of bad debts has only grown.

"Without large-scale debt restructuring and debt cancellation, as well as the restructuring of the lending mechanism, it will not be possible to achieve economic stability," Alexander Gabuev, the head of the Asian program at the Moscow Carnegie Center, told Kommersant. "Resources are now channeled into deliberately unprofitable projects, just so that regional authorities can report to center on the development of the province. " Growing debt and numerous bubbles (in the housing markets, finance, solar panels, etc.) at one time led to large-scale crises in Mexico (1994), Southeast Asia (1997), Russia (1998), Argentina (1998- 2002) and many other countries.

The problem of Chinese debt is very complex and confusing also because its decision will inevitably affect the interests of one of the influential groups. "The problem with the debt is that it will be necessary to hang it sooner or later on a certain sector of the economy," believes Michael Pettis. "Most often it is hung in such cases on the most politically weak sector, for example, households, taxing them. But in China this can not be done, because the decision is made to develop the economy through consumption, which is exactly provided by households. " To impose a tax on small and medium-sized private enterprises also, according to the expert, it will be difficult: it is there currently the main real growth of the economy takes place, in which case it will stop. Taxation of foreign firms will not give an effect: their share is too small.

"There remains only the public sector, which in recent years has been the main one," Mr. Pettis believes. "State enterprises are subject to central and regional subordination. If you have the additional task of centralizing power - you obviously tax the regional public sector, but here comes the problem: strong resistance from local authorities. If it were in Singapore, the entire regional business would be gathered in one room and reached a consensus, but China is too big. "

The ideological crisis

On the third place, the experts interviewed by Kommersant put the ideological difficulties faced by Chinese society. Over the past two decades, Chinese citizens, including many party members, have become accustomed to treating communist slogans as meaningless spells: reality has consistently refuted the Marxist-Leninist theory. Nevertheless, declaring their commitment to the ruling ideology was an indispensable requirement for building a career in almost any field, and the Chinese were following the demands of the Communist Party in a disciplined manner. The legitimacy of power was high due to economic growth and growing national power, which quite compensated for the lack of a real ideology.

General Secretary Xi Jinping, who came to power at the end of 2012, considered this state of affairs unacceptable. During the celebration of the 95 anniversary of the founding of the Communist Party in 2016, he stressed that "the rejection or oblivion of Marxism will lead to the loss of the essence and direction of our development." The secretary-general endorsed the words: ideological training has sharply intensified at enterprises, universities, the army and inside the Communist Party itself. Xichinpinism is difficult to equate to neo-Marxism: it is an eclectic mix of socialist slogans, traditional culture (the current secretary-general for the first time since 1949 took part in the celebration of the birthday of Confucius) and quite modern nationalism, united in the concept of the "Chinese dream". The definition of it is extremely blurry: it is "a dream of a great revival of the Chinese nation", and the rest is suggested to the Chinese themselves.

The difficulties with finding a new ideology are not surprising. "The change of generations, urbanization, the growth of education and well-being, and the slowdown in growth mean that there will be less and less opportunities to build domestic policy on old principles," Vasily Kashin, a leading researcher at the RAS IFES, told Kommersant. "A more flexible system of control over social life and new ideas. " Experiments in this area continue, but so far they can not be called finally successful, especially as regards increasing the ideological discipline of the bureaucracy. The main efforts are directed to it, as for carrying out the required reforms, the secretary general must be forced to "get out of the comfort zone" rather badly-baked party-state functionaries and start working.

Xi Jinping started to fight corruption and is trying to create a rigid power vertical; on the other hand, it strengthens administrative and ideological control, "Igor Denisov, Senior Research Fellow at the Center for East Asian Studies and the SCO, recalled." However, the effectiveness of these mechanisms is not obvious. The side effect is that they block the initiative. " According to the expert, "the constant pressure of the anti-corruption campaign fetters officials, they prefer to refrain from taking any risky decisions," that the reforms are not conducive.

Foreign policy

The fourth problem was the need to restructure China's foreign policy. In 2013 Xi Jinping actually announced the end of a passive foreign policy and began to rebuild China's relations with partners in accordance with its increased capabilities. The most striking manifestation of this new course was the initiative "Belt and the Way", in cooperation with which 2017 countries were involved in 65. Initially, it implied the construction of infrastructure in the space from China to Europe (Central Asia, Russia, Southeast Asia, the Middle East, etc.), but after the collapse of the Chinese financial markets in 2015, Beijing rethought the concept. Now generous investments have not promised to anyone, limiting themselves to the proposal "to jointly build a community of common destiny." The three-fold change in the name of the initiative (The Economic Belt of the Silk Road - One Belt, One Way, the Belts and the Way initiative) reflects the state of the concept as a whole: it has only to be approved.

The increased power of China also sharply put on the agenda the issue of reviewing relations with the countries of the region. The sharply increased activity of the PRC in the territorial dispute in the South China Sea gave unexpectedly good results. Instead of uniting and giving Beijing a rebuff after the decision of the Hague arbitration in the summer of 2016 (it recognized China's territorial claims as invalid), the Southeast Asian states preferred to yield, and by October 2017, Vietnam remained the active opponent of Beijing.

Nevertheless, this is only the beginning of the road. "Beijing's position in foreign policy is too ambitious, it deepens the confrontation both with neighboring countries and with the US," said senior lecturer at the University of Glasgow Neil Monroe to Kommersant. "Whether China will be able to contain premature desires to demonstrate its strength does not depend on only its world status, but also internal stability. " The tension between the China-US conflict over the trade and the status of the South China Sea could be reduced thanks to the skillful actions of Chinese diplomats, but the systemic contradictions between the old and new center of power have not gone away. Beijing does not hide that one of the main goals of the ongoing military reform is to create a comparable army with the US and limit Washington's influence on the western part of the Pacific.

Finally, Beijing faced a number of problems on its eastern and north-eastern borders. "To improve its international status, China will need to manage the conflicts around the South China Sea, the Diaoyu Islands (the Japanese name is Senkaku.-K), and build a new model of relations with Japan and Taiwan and stabilize the Korean Peninsula, "Professor Zhang Xin of the East China Normal University told Kommersant.

The attitude of neighbors to China beats anti-records: in Taiwan in 2016, an unfriendly Democratic Progressive Party came to power, and in Japan, according to Pew Research, the Chinese do not like 86% of the population. Separate problem is represented by North Korea, who actually took China as a hostage: Beijing can not allow Pyongyang to crash, but the constant nuclear missile tests of the DPRK give the US, Japan and South Korea an opportunity to build up a military grouping in the region that will ultimately be used to contain the PRC.

Social problems

In fifth place, experts put social problems that should worsen in the next five years. In addition to the already mentioned mass reductions in industry, China will have to get used to a new reality in which the number of able-bodied citizens will fall, the elderly will grow, urbanization is already completed, and salaries in industry are higher than in most Asian countries. Previous 30 years, the social consensus in China was that the welfare pie needed to be baked. Now it is time to divide it, redistributing a limited amount of funds in favor of different groups of the population. This process is rarely painless.

The aging of the population in itself will not have an impact on China in the next five-year period, but it should create a social security system adapted to the needs of citizens with a small number of children and a long life expectancy. "Aging is a bomb laid down for the whole of Chinese society," Professor of Tokyo University Akio Takahara told Kommersant. "At the moment, too little is spent on social needs, especially to support pensioners. 30 years ago, one retired 4-5 employees, now only 2,3. The pension system is highly fragmented, urban residents and employees of large enterprises can expect much more income than their fellow countrymen. "

The threat is also presented by inequality, which, coupled with planned mass reductions, can lead to unpredictable results. "The excess labor force can not only unbalance the economy, but also generate social problems and even political instability," Yuri Tavrovsky, an orientalist and author of the book on Xi Jinping, told Kommersant. In March 2016, over 100 thousand miners protested in Heilongjiang province, demanding payment of wages and accusing Governor Lu Hao of deliberate lies about settling the debt. According to the Hong Kong organization China Labor Bulletin, the number of strikes and strikes in China has increased from approximately 100 cases in 2011 to 2,6 thousand cases in 2016. "If the authorities want to avoid a powerful social explosion, they will have to start creating a structural program for the redeployment of laid-off workers," Vita Spivak, coordinator of the Asian program of the Carnegie Moscow Center, told Kommersant.


The sixth problem in the list was the ecology, which, according to the surveys of the China Daily, firmly ranks among the top 3 most troubling Chinese problems. Nobody thought about the environment during the rapid economic growth, but now the accumulated problems begin to undermine economic growth itself. According to the estimates of scientific staff of the US Academy of Sciences, dirty air reduces the average Chinese's life time by five and a half years. China is responsible for 27% of global harmful emissions. In 2016, according to the World Bank, 80% air from 357 major cities of China did not meet even modest national standards, while only 1% of the PRC population breathed safe from the European's point of view. 1,73 million sq. M. km of land became deserts, resulting in a deterioration in the living conditions of 400 million people. The costs of eliminating environmental damage, according to some estimates, reach 6% of GDP.

The first comprehensive law for pollution control in 25 was adopted in April of the year 2014, and it sharply tightened the penalties for exceeding emission standards by factories and factories. After that, a number of laws were passed that looked good on paper, but were ineffective in reality. "Chinese environmental laws are progressive by world standards," Ma Tianze, the head of the Chinese branch of Greenpeace, said. "Unfortunately, everything depends on the desire of local authorities to apply them." Excessive attention to the environment reduced the incomes of the industry, which had a bad effect on the provincial indicators. Choosing between GDP growth and clean air, Chinese officials often continue to bet on the first. "The solution of environmental problems will apparently require not so much the development of new measures, as the planned work of companies, central and local authorities to implement existing plans," Raisa Yepikhina believes.

The problem is realized by the Chinese authorities as very serious, and in November 2016 the action plan was adopted to reduce emissions. It involves not only prohibitive measures, but also economic incentives for green industries. "The solution of environmental problems has already begun, and the Chinese authorities are confident in their ability to solve them by changing the model of economic growth, transferring dirty industries abroad, moving to a digital economy and the economy of services," Vadim Sonin, a researcher at the Far Eastern Federal University, told Kommersant. However, these large-scale plans are unlikely to be implemented without changing the system of motivation of officials for whom career growth now directly depends on the growth of industry in the entrusted territory.

Management system

Finally, experts called the seventh problem the need for reform of the public administration system. The existing system of relations between the center and the regions allows leaders on the ground to sabotage the policy of the central government for years. "The authorities on the ground are only following Xi Jinping's directions, which are beneficial for her," Ivan Zuenko, an employee of the Center for Asia-Pacific Studies of the Institute of Far Eastern Studies, told Kommersant. "Everything else is drowning in a huge, bureaucratic and corrupt apparatus. Anticorruption campaign is only part of a set of measures to remedy the situation. By the nineteenth congress, Xi Jinping was able to basically establish his cadres at the head of most provinces, but he did not change the system. He was afraid, but so far the result is only that the authorities have become more passive. "

The root of the problem, according to Alexander Gabuev, is in the peculiarities of the work of the Chinese official. "For a long time, appointments in the party-bureaucratic system were based on the principle of a combination of loyalty and competence, while small salaries of civil servants were compensated by the possibility of enrichment at the expense of the workplace," he says. "The anti-corruption campaign has made bribery risks more tangible, was not". To overcome this problem, according to the expert, would be helped by "increasing the reward for professionalism and incorruptibility", as well as changing the criteria for evaluating their work.

A source: Kommersant

Author: Mikhail Korostikov

Tags: China, Economics, Politics, Analytics, Ecology