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The Asian side of the world

Jean-François Sabouret

Part two. National challenges and their strategies to overcome them

A political response to China’s economic challenges

Jean-François Huchet

Texte intégral

1March 2003

2Protected by a solid foundation, for many specialists, China epitomises the argument stated by Adam Smith two centuries ago that only the efforts of individuals to improve their personal conditions, are able to increase the wealth of a nation independent of the ineptness of its government and an improved political system. This vision, however, can be dangerous, as we are inclined to think that there is certain neutrality concerning China’s economic development today. The new team leading the country, put together by the 16th National Congress of the Communist Party of China, must confront the economic challenges that demand an improved government and establish counterbalances of power in its political system.

3The first challenge that needs to be met is that of modernising the Chinese banking system, which is in deep crisis, threatening the stability of the financial system. The authorities took too long to recognise the problem, continuing to underestimate the total amount of non-performing loans, which they estimate to be 25% of the total assets of banks, and this is following three attempts to recapitalise almost 200 billion dollars. Foreign “rating” companies estimate that the truth lies between 40% and 50% of the assets, with a debt of nearly 450 billion dollars, which equals to 43% of the GDP. The last attempt to restructure the debt saw the setting up of four defeasance companies to collect 175 billion dollars of non-performing loans from banks in order to resell them and apply pressure on public companies, which were at the root of the failure, so as to restructure and change their management methods. A recent report from the Bank for International Settlements clearly described what many had suspected, namely the difficulty of these four companies in finding buyers for their 175 billion assets and their inability to change the companies’ management methods. Optimists claimed that China is not like Japan or other developing countries, despite the total of non-performing loans being much greater. Their main argument is based on the fact that Chinese growth would allow the number of non-performing loans to be reduced in the economy. This argument can be easily refuted insofar as the problems are due to the weakness of companies’ management system and the state’s ability to put a stop to corruption. These problems are far from being resolved and everything points to economic agents not being able to repay their loans. Today, it is necessary to instil control mechanisms in the counter-balancing decision-making process, which would limit the economic agents’ self-serving strategies and improve the profit of investments.

4The second challenge concerns the growing inequality gap. After twenty years of reforms, China has become one of the countries in the world where income inequalities are at its highest. A rise in inequalities is a normal process during the economy’s “take-off” phase, especially in former planned and egalitarian economies. During the 1980s, all social classes benefited more or less from national growth. However, today, entire sections of the farming and rural population are seeing their income decline or becoming worse. Corruption, which is defined by access to political power, plays a central role in the social perception of inequalities. Sharing wealth through fiscal redistribution is still quite uncommon, although it is becoming increasingly necessary. Nevertheless, it will have to overcome enormous obstacles in order to develop; if corruption is not brought under control, economic agents will remain financial stowaways. The social welfare system is inadequately financed locally, thus preventing national solidarity from playing its role. The cities of inner and northeast China are confronted with the potential large-scale restructuring of a state sector that is dominant in their local economies, and the financial aid they receive is insufficient for their needs. Government efforts to solve the problem, notably by selling off state assets, (housing, privatising state SMEs, selling public shares in the stock market, etc.) have been unsuccessful. While the growing social discontent has been kept at bay for now, through a mixture of authoritarian measures and local charity run by organisations that are linked to the party, the authorities must act quickly and find more long-lasting solutions, some of which requiring institutional and political improvement.

5Finally, the third challenge concerns the environment. Today, China is paying the price for 50 years of catastrophic management of existing resources. It must face the problems that are typical in a developing economy, but those of China are of a disproportionate size compared to the problems in developing countries during their industrial “take-off”. A recent report from the UNDP indicates that air pollution in Chinese cities is three times higher than the levels recorded in Tokyo in the late 1980s, and eight of the most polluted cities in the world are Chinese cities. Almost 90% of rivers in urban areas are unfit for human contact because of pollution and almost 550 million people living in the north and the the northwest of China use only a twelfth of the average water consumption world-wide, on a par with those living in desert territories. The government is multiplying its initiatives, giving the green light to projects such as the Three Gorges Dam or the up-coming construction of three gigantic canals to bring water from the Yangtze River to northern plains. Paradoxically, for an authoritarian state, it is easier to carry out these projects than to think of solutions aimed at improving the management of existing resources, such as closing down polluting factories, applying laws on pollution, renewing water fees and making the administration more accessible to locals in terms of defining and conducting projects, solutions that should be prioritised according to the UNDP. Nevertheless, politically speaking, these solutions are more costly insofar as they include public government reforms at every level of the administration.

6To conclude, these three big challenges illustrate that questions about the role of the government and the opposition in the decision-making process should be at the heart of the economic strategy in the new Chinese team. Ignoring these questions could bring China to the brink of a relatively deep crisis, similar to those that have struck several emerging countries in the last thirty years.

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