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Momentous 2012

China at a Crossroads


China at a Crossroads


China faces momentous political and economic transitions in 2012. CommonWealth Magazine looks at how the country will test new systems and models in search of the best road forward.



China at a Crossroads

By Fuyuan Hsiao
From CommonWealth Magazine (vol. 481 )

Over the past five years, China has taught the West a new word in English: "shengshi," or "flourishing age."

A senior reporter for a western media outlet stationed in Beijing for many years captured the essence of the concept in talking about how China has evolved. A few years ago, he says, the most hotly debated topic in China was at what point it could become part of the G8. Then two years ago, American scholars reduced the ranks of the world's powerful countries to the G2 -- United States and China.

"This year, all that's left is the G1 – China," said the reporter in fluent Mandarin, sensing China's steadily expanding resolve.

Based on objective indicators, China certainly has the right to say to the world: "When China is not happy, the world will not be happy."

The country is the world's leading producer of more than 200 kinds of products and the world's biggest market for items such as cars, mobile phones and personal computers normally associated with advanced consumer markets. China not only can build airplanes, high-speed rail lines and aircraft carriers, it exports its technology abroad. While governments in the West have debt ratios of over 80 percent of GDP, China's stands at a mere 17 percent.

At a time when most countries around the world face serious shortfalls of funds, China's pockets are flush with cash that are poured into American and European bonds and may even be drawn on to rescue Italy.

Speed No Longer the Only Standard

In the recent past, China has been like a Formula 1 rack track, with the central government leading the way in flooring the accelerator and local governments pushing forward at breakneck speed. If they crashed, no big deal. The central government not only replaced the car but also the driver to get local administrations back into the race.

But China has recently decided to change the track's operating model. Speed will no longer be the competition's only standard of success.

2008 marked a turning point in the country's mind-set. In an exclusive interview with CommonWealth Magazine, former Shanghai mayor and Chinese Academy of Engineering president Xu Kuangdi said that after internal discussion and a self-evaluation in 2008, the Communist Party came to the realization that China was the world's leader in output but not in quality, lacking any prominent global brands. It produced 1.7 billion tons of steel annually but could not produce the best quality steel and still had to rely on imports. Its natural resources suffered from constraints, and acid rain was evident over a majority of its land.

"China is big but not strong. If the industrial structure isn't changed, we're finished," Xu says.

2012: Initiating a Comprehensive Overhaul

With a pivotal 2012 on the horizon, the issue of transition and transformation has grown more urgent.

Wu Xiaobo, a prominent management scholar and blogger on financial and economic issues, explains that 2012 will be a year of both economic and political transition – transitions that will force change in China.

China's core of political power, from the countries leaders and Politburo committee members to delegates of the National People's Congress and National Committee of the Chinese People's Political Consultative Conference will face the possibility of being replaced next year. 

Economically, growth in recent years has been driven by a 22 trillion renminbi (US$3.44 trillion) investment in major infrastructure projects, including a rail network, roads and airports. But with roughly a dozen high-speed rail lines and subway systems set to begin service next year, the age of big infrastructure projects has run its course, so what will China rely on next to stimulate growth?

The core concept of China's new five-year development plan, based on a consensus for change at all levels of the Communist Party, is transformation.

Three Major Ambitions, Three Big Mountains to Climb

The five-year plan – the major blueprint for China's development over the next five years – espouses three major ambitions.

1. Reverse the direction of the country's economic growth by upgrading its industrial structure China's export-oriented economy is to gradually become more oriented toward domestic demand. This suggests that the fulcrum of development will move from the agricultural and industrial sectors to the service sector.

2. Transform China's manufacturing sector focus, from production to innovation The goal is to have the manufacturing sector transition from industries relying on high energy consumption, low costs and "extensive growth" to those stressing low pollution and high added value. China will commit its full support to seven emerging sectors that can be developed sustainably, a strategy that will enhance homegrown innovative capabilities.

3. Pursue people's economic well-being rather than GDP The five-year plan lowers the annual GDP growth target to 7 percent and stipulates annual wage increases of 18 percent. It also calls for the establishment of regionally balanced social services and the promotion of comprehensive health and social insurance systems and pension funds.

Chen Yunlin, China's top negotiator with Taiwan as president of the Association for Relations Across the Taiwan Straits (ARATS), used three "I's" to explain the evolution of China's economic development strategy: phases featuring "introduction" and "imitation" have already passed by and now China is fully engaged in pushing "innovation," which is the main thrust of the new five-year plan.

"Not having one's own R&D capability results in a weak economic foundation that makes it impossible to be a major country over the long term," Chen told a CommonWealth Magazine reporter. China is concentrating its strength on forging an innovation-oriented country with homegrown brands.

These three ambitions all represent massive mountains to scale, leaving many wondering how China plans to climb them.

The answer: a powerful state machine, strong determination and talent.

Using a State Machine to Get Things Done

Wu Jieh-min, an associate research fellow in Academia Sinica's Institute of Sociology, observes that over the past 60 years, the state machine and its ability to mobilize people in taking great leaps forward has served as the driving force in the country's development. When the state apparatus decides to do something, it can pull the entire country together to achieve the goal quickly.

This state machine has been a powerful engine behind the country's rapid growth.

Hong Kong University of Science and Technology professor Xueliang Ding describes this state apparatus as an "iron triangle," consisting of a power structure, social control and a controlled market economy.

The power structure is a monopolistic system controlled by a small group of leaders leading a tightly controlled party, with affairs of state being managed from the top down.

Under this system whenever the leaders at the top reach a consensus and develop a policy, it can be quickly carried out. Following the magnitude 8.0 earthquake that devastated Sichuan in May 2008, for example, Shanghai was ordered by the central government to turn over 1 percent of its tax revenues for three consecutive years to Sichuan for reconstruction purposes. During deadly riots in Xinjiang in 2009, the central government turned troublesome Kashgar over to Shanghai with an order to provide economic assistance and guidance.

"These were both big expenditures, but nobody in Shanghai complained," says East China University of Science and Technology professor Cao Jinqing. China's government, he says, resembles a big company, where senior executives decide where to allocate resources, and business unit managers must loyally follow the strategy or be replaced.

The secret to the Communist Party's success, Cao argues, is the speed at which it can operate. Whenever it settles on a policy, it is carried out in a highly efficient manner with a minimum of friction.

The second pillar in China's state machine is tightly organized social control. Government thinking and initiatives are firmly based on the principle of "maintaining stability."

'Maintaining Stability' More Costly than Military

The Communist Party is highly sensitive to crises and has a profound sense of the difficult situations at home and abroad. Because of China's size, party leaders feel the country cannot be allowed to descend into chaos, and they therefore place stability above all else.

From the party, the government, the military and the Communist Youth League to committees of small city residential complexes, city management teams and even the Internet, China has an extremely large and tightly woven monitoring system, helping the state keep a lid on dissent.

According to statistics from China's Ministry of Finance, spending to "maintain stability" will cost 624.4 billion renminbi this year, surpassing military expenditures for the first time ever.

One overseas Taiwanese businessman, who runs a hard disk drive business and frequently visits customers in China, revealed that the volume of hard drives Beijing has bought for its surveillance systems has increased by an average of 30 percent per year over the past five years. Surveillance cameras have been widely installed at street corners, on buildings and in small city residential complexes. Their lenses can be adjusted to zoom in and out, and the systems' software can be programmed to conduct intelligent searches.

"You can run, but you can't hide," the businessman says. 

The social control resulting from this overriding drive to maintain stability offers stable soil in which to cultivate China's transformation.

Finally, the state-managed market economy provides the most powerful ammunition for the country's transformation.

Professor Ding observes that China's government has a monopoly on the most critical strategic industries and resources, with state-run companies having access to cheap land and financing as well as tax breaks. As the state-run monoliths have grown in size, they have looked aggressively for investment opportunities overseas, zeroing in on acquiring key companies and resources China wants to raid.

Last year, China's 316 biggest state-run enterprises and government holding companies had total revenues of 30 trillion renminbi, about 10 times the total of Taiwan's GDP.

Super Determined to Be a Super Country

Nobody can deny that China is super determined to be a super country. That determination is demonstrated by its spirit to pursue and surpass others.

ARATS' Chen told a story to explain China's resolve not to fall behind.

In 1978 when Deng Xiaoping went to Japan, he said after taking Japan's bullet train, "it's fast, really fast. China now really needs to hustle." Thirty-two years later, China has become the country with the biggest high-speed rail network in the world.

"That's how quickly China sets its mind to do something," Chen says.

"(China's) high-speed rail project was not done with return on investment in mind. Regardless of whether or not it loses money, it was part of the country's development strategy. China was highly determined. It wanted to do the project," says Lin Cheng-hsiu of the Haixi Workshop.  

The 1.8 trillion renminbi investment in high-speed rail was made with a number of strategic considerations in mind – technological development, regional balance, and geopolitics – revealing China's heightened sensitivity toward its own position in the world, Lin adds.

A Transformation Dependent on Talent

China may have a powerful state machine and the determination needed to execute its transformation, but talent will be the most important weapon it needs to achieve success.

"Human resources are the number one resource and are the key to the development of the state's enterprises," said President Hu Jintao at a national talent conference in May.

China's mid- and long-range human resources plan has already been carried out for many years, part of which is focused on recruiting global talent. The Organization Department of the Communist Party's Central Committee and a State Council task force on human resources set up a "1,000 Plan" to recruit 1,000 experts from abroad, and local governments have followed with their own "1,000 plans." Even universities and companies have adopted "100 plans" to snatch up overseas expertise.

 "(China) is looking for talent at every level," says Ho-Mou Wu, the executive dean of the National School of Development at Peking University, who has personally witnessed his university's intensive efforts to recruit talent.

The emergence of a new middle class in China's coastal cities composed of people who now earn more than US$4,000 a year and want a better, more civilized life has become an important resource in pushing China's transformation.

The New Middle Class: Challenging Authority

In the middle of August, 12,000 residents of Dalian took to the streets and held a rally outside city hall to demand that the Fujia Dahua petrochemical plant, which produces the toxic chemical paraxylene, be relocated.

Daily Telegraph reporter Peter Foster described it as a rare protest by China's new middle class. This newly emerging class cares about its quality of life and values the environment and individual rights, emboldening it to challenge public authority, he observed.

China may have lofty goals to reinvent itself, but the process of transformation is fraught with difficulties. The state-managed market economy has spawned corruption and the rise of vested interests. Per capita income remains low, complicating efforts to stimulate domestic demand. The widening gap in capital held by state-run and private enterprises makes it hard to cultivate vigorous and innovative businesses and industries.

"(We) are still crossing the river by feeling out the stones at the bottom one step at a time. It's just that there are many different types of stones. China is in a constant process of exploration, and we always face challenges and risks," says Wang Yi, the 58-year-old head of the Taiwan Affairs Office of China's State Council. Wang, who has seen China at its poorest and most prosperous, can appreciate the sense of apprehension as the country molds its future shape.

Over the past three decades, China has been like a big roller coaster seemingly on the verge of flying off the tracks. But, instead, it has continued to climb a new road after a new turn.

To many Chinese citizens, those 30 years may have seemed like two lifetimes. The first involved learning how to make money to survive, while the one they're living today is compelling them to learn how to spend money to live better.

Ultimately, that may be the biggest driver of change in China.

Translated from the Chinese by Luke Sabatier