Fog is lifting over China but its reform efforts may not prove enough

 
John Hulsman
DAVID Cameron is right; there is no point in being subtle. He is in Beijing for a three day visit – accompanied by an army of 100 British business leaders – in an effort to strengthen trade links with the world’s fastest-growing Great Power. So important is the prize of enhancing economic ties with a country whose “slower” growth rate is an unimaginable (to western ears) 7.5 per cent, Cameron is right to pull out all the stops.

But beyond the lure of sharing in China’s untold riches, a lot goes on in the country that is simply not understood. With the ponderously named Third Plenum of the Eighteenth Central Committee Meeting now in the books, the fog is lifting. For the first time, the Communist Party explicitly calls for capitalism to play the “decisive” role in China’s economy; in practice, this seems to mean letting the market determine interest rates, and gradually making China’s currency, the yuan, fully convertible, both huge steps in further opening the economy. In addition, the criminally stupid One Child Policy will be relaxed. Given the myriad recent examples of western governments unable to address their most basic problems, President Xi Jinping’s reform programme has much to recommend it.

But with its gloomy demography (largely the result of the disastrously misguided One Child Policy), China could well get old before it gets rich. It also stands in real peril of being ensnared in the Middle Income Trap, the common case where emerging markets grow very rapidly in the first stage of their economic take-off due to their low wage advantage, only to stagnate as they prove unable to move up the value chain.

It is an open question as to whether Xi’s ambitious agenda will be enough to stop Beijing from running afoul of these structural problems. State-Owned Enterprises, a constant threat to crowd out the country’s more efficient private sector, are not really dealt with in the new plan; most likely this drag on growth will only get bigger.

Also, relaxing (but not abolishing) the One Child Policy is a classic example of shutting the stable door long after the horse has fled. By 2030, it is estimated that China will have a labour shortage of around 140m workers, which amounts to the greatest jobs shortage ever, if proven true. This problem alone could undermine China’s economic miracle.

The Third Plenum left no one in doubt as to who is in charge: Xi is establishing a National Security Commission, taking direct, personal control of domestic security, while also being in the vanguard of a new, leading small group of Party leaders, charged with keeping the reforms on track. But as Barack Obama found out to his peril, if a leader is indelibly identified with an initiative, he had better get that right, or there will be no one else to hide behind.

Dr John C Hulsman is president and co-founder of John C Hulsman Enterprises (www.john-hulsman.com), a global political risk consultancy. He is a life member of the Council on Foreign Relations, and author of Ethical Realism, The Godfather Doctrine, and Lawrence of Arabia, To Begin the World Over Again.

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