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China at a Tipping Point

China Must Address the Needs of Its Growing Middle Class

China’s rapid development has led to an expanding middle class, and must shift its economy to match this growth, writes Alex Glennie.

Workers set up the advertisement to celebrate the upcoming 90th anniversary of the founding of the Communist Party of China on a pedestrian bridge in Shanghai, China. (AP/Eugene Hoshiko)
Workers set up the advertisement to celebrate the upcoming 90th anniversary of the founding of the Communist Party of China on a pedestrian bridge in Shanghai, China. (AP/Eugene Hoshiko)

Between June 27 and July 2 an Institute for Public Policy Research, or IPPR, delegation traveled to Beijing and Chongqing with Lord Peter Mandelson, former UK First Secretary of State and former European Trade Commissioner, as part of our program of work on the future of globalization. During this fact-finding mission we met with domestic businesses and business leaders, senior policymakers and politicians, academics, and other thought leaders, and held wide-ranging discussions on China’s response to globalization.

On July 1, the Chinese Communist Party marked the 90th anniversary of its founding. During a week of lavish celebrations to commemorate the occasion, which included parades, revolutionary re-enactments, and the official opening of a new $30 billion high-speed rail link between Beijing and Shanghai, the focus was on China’s accomplishments over the past few decades. In a keynote speech to party officials, President Hu Jintao praised the country’s socialist market system for its contribution to modernization and development, and pledged that it would underpin future efforts to deliver fairness, justice, and prosperity for all.

The scale and pace of China’s economic development has indeed been remarkable by any standards. China has experienced average annual growth rates of 10 percent for more than 30 years, and it is now the world’s second largest economy. On some projections, it may overtake the United States in terms of purchasing power parities as early as 2016. China is also the world’s largest exporter, having usurped Germany’s top spot in 2010, and holds the biggest share of foreign exchange reserves.

Yet these achievements do not appear to have led to a sense of complacency on the part of the Chinese leadership, who are concerned about how to create a sustainable model of growth. In 2007, Prime Minister Wen Jiabao was uncharacteristically candid in describing China’s economy as “unbalanced, uncoordinated, and unsustainable.” While this language might seem incongruous in the context of such stellar growth rates, it reflects recognition that China needs to end its dependence on investment and net exports as a driver of growth and promote higher levels of domestic consumption if it is to maintain and strengthen its position in the global economy.

To a certain extent this rebalancing process has already begun. Some experts are predicting that China’s trade surplus will fall to less than 2 percent of GDP in 2011, a significant drop from its peak of 9 percent in 2007. While investment levels remain very high (having increased to nearly 50 percent as a share of GDP in 2010-11 from around 42 percent in 2008), they should fall as the $586 billion stimulus package that was rolled out in 2008 in response to the financial crisis is brought to an end. Rising levels of real wages should also help to increase consumption.

But significant challenges remain. Figures released by China’s National Bureau of Statistics in July showed that prices had risen 6.4 percent over the last year—a three-year high. Given how closely the regime’s popular legitimacy is linked to the success of the economic policies that have driven the rapid growth of China’s middle class, it is unsurprising that inflation has jumped to the top of the government’s agenda. It fears a repeat of the instability that accompanied high inflation rates in the 1980s and that culminated in the protests in Tiananmen Square.

In addition to the short- and medium-term pressures on living standards caused by rising prices, there are a number of deeper structural problems that must be addressed if China is to avoid falling into the “middle-income trap” that ensnared Argentina, Venezuela, and the former Soviet Union as those countries sought to lift their own populations out of poverty. As China and its people become wealthier and more educated, there is a need to shift away from labor-intensive, manufacturing-led growth and move toward an economic model that both boosts levels of personal income and improves work-life balance—notions at the heart of the “just jobs” agenda. This will require the development of new sectors, particularly in services, and the creation of a much stronger social safety net than is currently in place.

There is evidence to suggest that China’s leaders are starting to engage with these issues. The new Five Year Plan commits the government to “develop new kinds of consumer services, improve policies to encourage consumption…protect consumers’ rights and interests, and try to upgrade the consumption structure.” It also pledges to “strengthen labor law enforcement, improve the mechanism for handling labor disputes, improve working conditions, and safeguard workers’ rights and interests.”

Policymakers will need to quickly make these rhetorical promises a reality though, if they are to create an economy that can successfully absorb the large numbers of Chinese joining the country’s growing middle class, while equipping them with the education and skills that they need to compete and prosper in a globalized world.

Alex Glennie is a research fellow at the Institute for Public Policy Research.

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