The end-game in China

In her book The Elephant and the Dragon , about the rise of India and China, author and journalist Robyn Meredith narrates a political joke about Chinese leader Deng Xiaoping, the man who opened up the Chinese economy. In that narrative, Deng is seated in his car and reading a newspaper when his driver interrupts him to say: “Comrade, we’re at a crossroads. The sign says turn left for Communism, turn right for Capitalism. Which way should I go?” Deng says: “No problem, just signal left and turn right!”

That deceitful ‘right turn’ is, jokes aside, a metaphor for how a notionally Communist regime undertook a sweeping ‘gaige kaifang’ (reform and opening) initiative under the guise of implementing “socialism with Chinese characteristics”. To Deng, it didn’t quite matter if a cat was black or white — so long as it caught mice.

Those reforms, accompanied by the incentivised migration of millions of farmers and migrants from the hinterland to provide cheap labour to the Special Economic Zones in the southern and eastern coasts, propelled China to becoming “the factory to the world”. Nearly 40 years later, China is today the world’s second-biggest economy. Ironically, the havoc wrought around the world since late last year owing to the coronavirus, which has its roots in Wuhan in central China, has only reinforced the country’s continuing centrality to the global manufacturing supply chain.

China’s other headline achievements over this period are no less striking. As journalist Dexter Roberts, who served as Bloomberg Businessweek’s China reporter and bureau chief for more than two decades, points out in The Myth of Chinese Capitalism , the country today has a high-speed railway network that accounts for two-thirds of the world’s total; cities with craning skyscrapers; and roads jammed with new cars while, below the ground, ever more intricate webs of subway networks expand. China is also a growing power in artificial intelligence and the world’s second-largest producer of patents; today, it is second only to the US in producing billionaires.

However, that breathless growth-at-all-costs strategy was underwritten by many factors, which now appear to have run out of steam. China is in some ways at an inflection point. The ‘social compact’ that the Chinese Communist Party entered into with its people — under which the Party would deliver high growth and a better material life for everyone, in return for which the people would accept limits on their political and other freedoms — is beginning to fray.

Economic shift needed

For a start, China’s days of supernormal GDP growth seem to be over, putting the country at risk of being caught in a ‘middle income trap’ (to which India too is susceptible, in the estimation of some). Years of investment-led growth have saddled local governments and companies with excessive debt; banks are overrun by bad loans. Factories in manufacturing centres, which once relied on paying low wages to turn a profit, now cannot find enough workers, and many are struggling to survive.

Farmers in the countryside remain at the mercy of a system that restricts their ability to sell or rent their land; local governments, meanwhile, are addicted to the revenues they earn from seizing that same land and converting it for commercial use.

All this has meant that the fruits of China’s growth thus far have not been uniformly shared. Migrant workers, who work the levers of the manufacturing economy, in particular have reason to feel short-changed by the hukou system of household registration, which tethers them to their home village and denies them access to social welfare services in the cities to which they relocate in search of work.

And despite the many pledges of reform of this system, migrant workers remain second-class citizens. Worse, urban residents are a powerful ‘lobby’ group that resists any concessions that will erode their own entitlements — or compel them to rub shoulders with the ‘dirty, unwashed masses’.

China’s technocratic rulers are acutely aware that the growth model of previous years is busted, and that the country needs to move to an economy that is less reliant on low-cost manufacturing, and more on service industries. But that transition has been hard to engineer, partly owing to the Communist Party’s unwillingness to retreat from a model that (for all the perception that it ‘signals left and turns right’) gives primacy to state-owned enterprises (SOEs).

Andrew Batson, research director at business consultancy Gavekal Dragonomics, noted that the government’s repeated use of SOEs to stimulate short-term activity has weakened the private sector and lowered productivity growth. As a result, he reckons, China is “increasingly locked into a slower-growth future.” Such a prospect, where the Party is unable to keep its end of the bargain, could test the social compact even more: already, restiveness is in the air.

In the global eye

There are other factors that are working against China, as Roberts points out. China is ageing, and is at risk of ‘going grey before it gets rich’. And at precisely the time when it needs to make a tectonic shift of its economy, it is facing intense global backlash over its mercantilism and military muscle-flexing. Its inept handling of the coronavirus pandemic, and its resort to disinformation and propaganda, has only reinforced the notion that China, for all its economic and military heft, is not a responsible global power.

Roberts cautions that all this bodes ill for the world. “Stagnation or something much worse happening in China is bad for the world,” he notes. “While a too-powerful China is a threat to liberal values, a wounded China could well drag down economic growth on a global scale.” That is a worrisome prospect — for the world as much as for China.

Taking us across many parts of China, but particularly to the southern industrial belt in the Guangdong province and to the family home of the Mo clan (of migrant workers) in the Guizhou province in southwestern China, Roberts gives us a flavour of a China in transition over 20-plus years.

The book is in some ways a disquieting read — given how much is stake for China and for the rest of the world, and the many perils that lie ahead — but it is a compelling story from which we cannot afford to look away. There have been many prophecies about “the coming collapse of China”; many of them have been proved wrong. This cautionary story, however, rings a little too true.

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