July 26, 2012
by John Lee
The reporting of Tony Abbott's speech on Tuesday to AustCham in Beijing by China's state-owned press was filled with platitudes about strengthening co-operation between the two countries.
Predictably, official news outlets such as Xinhua left out some of the Opposition Leader's more confronting statements such as the one that China would prosper even more if "its people enjoyed freedom under the law and the right to choose a government".
Bold comment on the values of other governments will leave some former diplomats fretting and tut-tutting about disrespecting our largest trading partner.
But focusing on values also matters for other reasons. Whether Abbott knows it or not, he is simply reaffirming what many prominent Chinese economists are already saying about what the country needs to do to build a surer foundation for further prosperity.
Although huge in absolute size, China is still a poor country. With a per capita income of about $US7500 ($7330), it ranks just inside the top 100 countries on this measurement. History tells us that few countries will make the transition from poverty to prosperity without major reforms.
The first step is to ensure the continuation of economic growth. The problem is that this can be achieved only through significant reform of China's state-dominated economy. For example, the country's 150,000 centrally and locally managed state-owned enterprises receive about three-quarters of all formal bank loans in the country, while the four to five million domestic private firms are forced to fight for the scraps.
Moreover, every major sector except for export manufacturing is dominated by SOEs. In 2010, the largest three SOEs (PetroChina, China Mobile and China National Petroleum) made more profits than the combined profits of the country's largest 500 private domestic firms. The bias towards SOEs exists despite the fact that private domestic firms are two to three times more efficient on any number of credible commercial measurements such as return on capital, profit margins and return on assets. Putting more and more national wealth into less and less efficient firms is clearly an unsustainable strategy.
Economic growth matters primarily because it improves the lives of its citizens. But dividing annual national output by the number of people gives no indication of how wealth is actually distributed throughout the country. In China's state-dominated economy, revenues of SOEs have been rising at an average of 20-30 per cent each year since the 1990s (when the state-dominated model re-emerged). It is estimated that half of all domestic savings in the country's financial system are deposited by SOEs.
In contrast, mean household incomes have been rising by 2-3 per cent a year over the same period. Studies are now suggesting that the disposable income of 400 million Chinese has actually stagnated or gone backwards over the past decade. Other indicators reveal that absolute poverty (those living on less than $US1.50 a day) has actually increased over the same period. Currently, more than half of the country is still living on $US2 a day or less.
The bottom line is that across-the-board incomes have not been rising at anywhere near the same rates as growth in gross domestic product - an exact reverse of what occurred from 1979-89, when the household rather than state sector drove economic activity and growth.
Within one generation, China has gone from being the most equal society in all of Asia, in terms of distribution of income, to the least. In China's state-dominated model, opportunity and privilege are tied to SOE and Chinese Communist Party connections. Of the CCP's 80-85 million members, four-fifths are the business elites, and those joining are upfront about the fact that they do so to gain access to opportunities that they would otherwise be precluded from. Unsurprisingly, Chinese elites have emerged as the strongest supporters of the one-party system.
The upshot is that a relatively small number of well-connected insiders benefit at the expense of the majority. It also means that the much-hyped transition towards a domestic consumption-led economy driving growth is all-but impossible under these circumstances.
The clear solution is for SOEs to take a back seat in the economy, allowing the country's fledging private sector to drive the next stage of development. This is what occurred in the once authoritarian systems in Japan, South Korea and Taiwan during their transition from middle to high-income, advanced economies.
As we know, the rise of an independently wealthy and powerful middle class in these countries eventually put enforceable legal limits on the power of political officials, and paved the way for democratic reforms to occur.
For China, its state-dominated approach to capitalism arose after a reflective period for the CCP after the 1989 countrywide riots, and the fall of authoritarian regimes in the former Soviet Union and in eastern Europe.
The emergence of the Chinese corporate state was gradually cobbled together to ensure that the CCP remains the primary dispenser of business, career, professional and even social opportunity in the country, thereby tying the futures of new and existing elites with that of the party.
The CCP's record of three decades of economic growth, albeit from a very low base, is impressive. But many Chinese economists, and even some political officials, are increasingly voicing their concern that such a political-economic model, despite its impressive achievements, is reaching its limits. Perhaps Abbott has moved a few steps faster than diplomatic protocol demands, but his comments have nevertheless hit the mark.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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