China, Growth and the New Order

The 21st Century Council has just wrapped up a three day meeting in Beijing (rhymes with Smog) in private discussions with the Chinese leadership about understanding China and her future.  For me it was a rare opportunity to meet and see the Chinese leadership up close.  This new group of leaders (Premier Li and President Xi) are seen as a breath of fresh air by many Chines I spoke with, a new beginning to deal with the big issues China faces.

In the Chinese system, seven leaders emerge for up to ten years, and President Xi has laid out their priorities: growth that doubles 2010 GDP by 2020 (i.e. seven percent growth/ year), bringing another 100 million Chinese out of poverty, dealing with their terrible pollution and food issues, and avoiding the middle income trap so many developing countries face.  In meeting after meeting, the messaging was repeated:  the model of hegemony that comes from power is not what China will do, that China will always be peaceful and defensive, not offensive in her military, that China will fully participate in the global governance system, that corruption will be rooted out, and that they are still a developing country with many challenges and reforms ahead.

This is quintessentially Chinese: lengthy references to the history and abuse of the Chinese by foreigners, the need for mutual respect, the expression of common interests of peace among all of us, and the five year plans they are developing for the yearly plenary (starting in a weeks time.)  For Chinese leaders history appears to start in December 1978, where Deng Xiaoping unveiled the policies that have lifted China from $200/year GDP per person now to above $7000/per person.  President Xi clearly models himself after Deng, and has consolidated the power to push reforms they now predict will be "comprehensive and reforming" of the Chinese system.  The third Plenum begins in a week, and Chinese are anxiously awaiting real reform in the one child policy, the registration system that prevents people from moving to cities (called the "hukou"), and perhaps, the currency and state owned enterprise reform issues.

Of course they don't discuss the terrible censorship, and human rights issues they have.  President Xi himself attacked the freedom of the Internet, and encouraged the latest attacks on bloggers.  Real estate prices of Hong Kong, and London, and other international cities will rise rapidly as the Chinese newly rich take their money out of the country ahead of the coming investigations in their business dealings.  The Chinese leaders mindset appears to be more like an energy field.. where as long as there are small disturbances they can tolerate it but anything major, or disruptive, they will deal with and often harshly.  My sense is that this will continue to be true for a long time.

The Chinese system seems to produce leaders who are engineers, technocrats, and very analytical and outcome driven, with key metrics (one used the Key Performance Indicator terminology).  Its clear they admire the success of Singapore, but nothing has ever operated quite at China's scale.

In my remarks at the conference, I came to the conclusion that we would give the leadership the benefit of the doubt that they will be able to continue growth for much the next decade.  You have to assume, in this version of the future, that they can rein in the state owned enterprises, stop the rampant corruption especially from the "princelings", fix the water and pollution issues in a manner similar to what the US did, and adopt new tax systems that are more redistributive (as they say "socialist").    And I will assume they are sincere when they say that they are focused on their own internal issues, and will refrain from hegemony as they promised.

The Internet in China is expanding so rapidly it will be determinative in a wide range of issues.. more than 600 million mobile phone users, about 400 million smart phones to be sold next year (97% of them Android!).  The news in China is really now about Weibo (their combination of Twitter and Facebook) and Wechat (their version of Whatsapp/BBM/Instagram).  Each is having phenomenal growth and, even with the censorship, will shape the government from the standpoint of local feedback, complaints, environmental demonstrations and future political crises.  Since the Internet and its new companies have the habit of showing up in the middle of the carefully planned five year cycles of China, how will the leadership react as, for example, a broad new idea sweeps the population on the Internet and they can't delete or suppress this new feeling of change or justice?

Looking forward post ten years, the picture gets much much worse, I said.  The forces of demographics, globalization and automation, which have so favored China up to now, probably turn against their current plans.  The demographics of China will begin to look like those of Korea and Japan, and globalization means that high wages in China cause the next shift of industry to other lower wage countries like Indonesia and the Phillipines. Automation, in particular robotics, will make the high volume low cost manufacturing systems much more efficient and result in many fewer employees, just as has happened in the west (Its called the "hollowing out of the middle class.")

Japan, where I was earlier in the week, now has an energetic nationalist leader who may be capable of sorely needed reforms after two lost decades and serious deflation.  To see the future of China, look at Japan, where the political system is hard to change and the aging population is just happy enough to continue the policies from the past, and economic growth is limited by their terrible demographic issues.  Another future for China might be Korea, where growth suddenly stopped (i.e. 1%) and long seated internal frustrations are now on the public agenda.  Both Japan and Korea avoided the middle-income trap, but China may not have enough growth years ahead, or may have to change its approach radically again.

So perhaps the urgency you feel in China is right.. the old saying that in China the race is to get rich before the country gets old can be extended: in China the race is to get rich before your job is automated.

When China hits the wall (which is growth of three percent or less), many of the deep seated issues suppressed in this leadership's view of the world will come to the fore.   All of her leaders emphases the logic of growth and the need to avoid the middle-income trap.  When that growth stops, the strength and toughness so appealing now internally will come in question.  Freedom of expression, an open Internet, and inclusiveness are probably the only way to address these future problems.  Technology, free speech, and the Internet can really build a modern country of ideas, research, innovation and prosperity.  As they set their goals to avoid the middle income trap, I'm sure they will have to adopt more modern rules for currency, for their legal system and especially for learning, the Internet and free speech.

Lets hope the leadership figures this out in time.
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