The close of the 18th Chinese Communist Party Congress completes the biggest step in China’s 2012-2013 leadership transition. For incoming CCP General Secretary Xi Jinping and his colleagues, the next few years bring great responsibility. They also bring great challenges.
Chinese citizens will be looking to these leaders to guide their nation into a new era. China is now facing a major transition point, and the policy approaches that worked for the past thirty years will not work for the next thirty, or even for the next five. Until now, China’s economic growth has depended primarily on exports and state-funded fixed asset investments in infrastructure and real estate. That model is now running out of steam. Domestic wages are rising, which is eroding China’s cost advantages as a low-value-added manufacturer. Fixed-asset investments are consuming too much energy and concentrating too much wealth among state-owned enterprises.
China has also depended too much on a growth-at-all-costs approach that often ignores competing policy goals such as protecting the environment. Many Chinese officials and citizens have long considered industrial pollution a price they were willing to pay to get access to jobs (for the citizens) and tax revenue (for the officials). Now that balance is changing. China is now an upper-middle income country, and as Chinese citizens move up the development ladder they are increasingly deciding that a better quality of life requires not only steady paychecks but also clean air and water. Chinese citizens still want their leaders to keep the economy growing, but in a more sustainable way that also takes other needs into account.
To keep the country growing and provide the lifestyle benefits their citizens are asking for, China’s new leaders must do two things.
First, they must shift the economy toward a new growth model that will depend less on exports and fixed asset investments and more on domestic consumption and higher-end technology innovation. Consumption and innovation are connected and both benefit China’s growing middle class.
If Chinese companies can move up the value chain from lower-end to higher-end manufacturing, they can pay their employees more, which will expand job and wage opportunities for average Chinese citizens. Once Chinese citizens have better jobs and higher wages, they can then buy more, allowing Chinese companies to sell more of their goods domestically instead of depending primarily on export markets, which can be unpredictable. Higher wages for Chinese workers would also address one of the biggest complaints about the current system—that wealth is too concentrated in the hands of a well-connected few at the expense of ordinary Chinese.
To do this, Beijing must get innovation policy right. Chinese leaders have already demonstrated their willingness to direct massive financial resources toward developing the technologies of the future. Financial resources cannot solve everything, however. Business incentives are also important. What we have learned in the United States is that the biggest innovations sometimes come from the smallest companies. To create an environment for innovation, countries must create an environment where anyone can succeed, even small private companies with good ideas but few political connections.
That environment does not yet exist in China, and that is holding the country back. Instead of a level playing field where anyone can succeed, most of the support in China (both political and financial) goes to state-owned enterprises, and new ideas generated by the private sector are left to die on the vine. That must change. Going forward, China must shift from allowing government officials to support their favorite state-owned enterprises to allowing banks to choose projects based on profitability rather than political connections. That is the only way China can climb up the value chain to become a major global innovator.
Second, in parallel with these big economic changes, Beijing must get also serious about cracking down on pollution. To be sure, Chinese leaders have made great strides on the environmental front in recent years. Environmental standards have tightened considerably, and China now has a growing community of NGOs, journalists, and citizen watchdogs working to monitor environmental conditions and expose illegal polluters. The problem is enforcement. Local officials are not always interested to follow up on citizen complaints, and when local officials ignore them, there is not much the local citizens can do. In some cases, frustrated citizens are staging mass protests to call attention to these problems. Environmental protests have increased in number and scope over the past few years, and that creates a stability problem for Beijing.
Chinese leaders are already responding to these citizen complaints. Hu Jintao’s work report to the 18th Party Congress dedicated an entire section to China’s growing environmental problems—a first for these reports and a clear signal that the environment is gaining political importance. No matter how serious China’s top leaders are, however, they cannot clean up pollution until they get local officials on board, and that will require an administrative shake-up. At a minimum, Chinese leaders must increase the priority given to environmental factors in local officials’ performance evaluations. Those evaluations still place too much emphasis on economic growth. Environmental conditions are also assessed, but those assessments are given a much lower priority in the overall ratings. To ensure environmental assessments are accurate, Chinese leaders should also give the country’s environmental protection bureaus more independence and higher administrative status vis-à-vis the local officials they are supposed to be overseeing. Those are the types of actions that would convince local officials that Chinese leaders mean business.
Addressing these economic and environmental challenges will not be easy. All of these reforms will require China’s new leaders to overcome vested political interests, and that is difficult to pull off in any country. If they want to move their country forward, however, they will have to deliver. The Chinese citizens are certainly hoping they will succeed. As the big party congress comes to a close, observers in China and around the world will be watching to see what these new leaders can do.
Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress.
