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Friday, March 11, 2011

EDITORIAL

China struggles with change

China's legislature, the National People's Congress, commenced its annual 10-day session last weekend. The body is pretty much a rubber stamp, providing a democratic veneer to the decisions of the Chinese Communist Party. The session does shed light on affairs of state, in particular the government's budget and its economic priorities. In his speech, Prime Minister Wen Jiabao highlighted his concern about rising inequality within China and the dangers posed by expectations that rise faster than the pace of change.

China's economic juggernaut may be reshaping the global balance of power. The country is now the world's second largest economy and incomes, both urban and rural, have grown by 9 percent in the last five years; hundreds of millions of people have escaped poverty in China over the last two decades.

But, for many Chinese, change is not coming fast enough. Growth has been uneven — not surprising, in a country of China's size. According to the World Bank, China's Gini index, which measures inequalities of wealth, now exceeds that of every developed country.

Worse, there are few outlets for the anger and disappointment. As a result, it is estimated that last year China had 180,000 incidents of large-scale public protests and demonstrations, a doubling of the number of mass disturbances in five years. That has in turn yielded a hyper-vigilant party and police apparatus to ensure that any and all protests are contained.

In his speech to the NPC, Mr. Wen underscored risks posed by inflation, which has been growing about 5 percent per month in recent surveys. Rising prices erode the gains enjoyed by Chinese, who see increasing shares of their income going to pay for staples such as food. Real estate markets in major cities have been especially frothy, a phenomenon that compounds public anger when ordinary Chinese cannot afford housing. Add corruption and environmental degradation, and more and more Chinese feel that genuine prosperity remains just beyond their reach.

The Chinese government has a daunting assignment. It has to keep the economy expanding and ensure rising standards of living, while keeping inflation under control. In practical terms, that means the government will aim for growth of around 8 percent this year, but an average economic growth will fall to 7 percent from 2011 to 2015.

Mr. Wen promised to focus on helping China's poorer citizens. As total government spending rises 12.5 percent to $823 billion in 2011, funds for low-income housing will increase by 30 percent to $15 billion. The minimum wage is slated to increase, but it is not clear by what amount. Funds for education and health insurance are also set to grow.

A core component of Mr. Wen's vision is transformation of the Chinese economy. Rather than continuing the focus on exports and perpetuating the central role played by state-directed investment, the new plan seeks to make domestic consumption the driver of China's growth. This will better spread the wealth by giving more Chinese a stake in their future, undercut the opportunities for corruption and reduce friction with China's trade partners.

But China's leaders have no illusions about the stakes. While Mr. Wen promised to better the lives of ordinary Chinese, he also announced plans to boost spending for the state security apparatus. Total spending for public security is anticipated to reach 624 billion yuan ($95 billion), a 13.8 percent increase. This is the first time that such spending tops the (official) military budget, which will grow to 601 billion yuan ($91.5 billion) a 12.7 percent increase.

That last figure gets a lot of attention, and rightly so. The Chinese military has enjoyed double digit budget increases in the two decades since the Cold War ended. And most experts believe the official statistics are understated by a considerable amount. Nevertheless, Chinese officials insist that the buildup is defensive in nature and threatens no nations.

Those assurances count for little these days. Beijing's readiness to use force against its citizens raises concerns among its neighbors. Not only are there fears that such heavy-handed single-mindedness will color its foreign policy, but other nations also worry that China may use foreign policy to distract a restive population. The easiest way to quell public dissent is to rally around the flag during a foreign conflict.

There is one more reason to be worried. China's leadership changes next year, with Mr. Wen and President Hu Jintao stepping down so that the "fifth generation" can take charge. Transitions in authoritarian states are always tense moments as factions compete for influence. Many observers believe that the assertiveness of Chinese foreign policy during the last year reflected jockeying for position before 2012: No leader can afford to be seen as soft on foreign policy. If that assessment is correct, then other governments should be prepared for yet more assertiveness by Beijing in the months ahead.



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