Has China Reached a Turning Point? No. It’s reached four.

I was invited to participate in a symposium hosted at Quinnipiac University on “A Resurgent China.” The suggested topic was “Has China Reached a Tipping Point?” After ensuring that I could slightly edge the discussion away from Malcolm Gladwell, I agreed. For a business school audience, I went a bit broad and tried to bring up plenty of topics for discussion. There was a camera, I signed a release, and Quinnipiac has a YouTUBE channel, so there’s a chance that a video of the presentation will exist online in the future. Below is the text as prepared:

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Has China Reached a Turning Point?

Jeremy Wallace
Quinnipiac University
April 18, 2013

I want to thank everyone for being here and for giving me the opportunity to speak.

The title of my talk is a question: has China reached a turning point? My answer to that question is to say that it appears that China has reached four different turning points. This makes it very hard to predict where China will end up going because if one turns four times one can end up heading in almost any direction.

The four turning points that I have in mind are the following. The first two relate to urbanization, the subject of my own research. First is what I would refer to as the Lewisian Turning Point. The 2010 Census showed that China now is over 50% urbanized. Second, the regime seems to be moving towards the development of larger scale cities as opposed to spreading out urbanization across many different localities. Third, China’s transition from an investment and export based economy to one that is increasingly consumption-based. Fourth, and finally that China’s rapid economic growth seems to finally have run headlong into the environmental consequences of that growth.

I will speak briefly about each of these turning points before coming back to the question of where China is headed.

The Lewisian Turning Point is named for the Nobel-winning Economist Arthur Lewis and his model of surplus labor. To simplify, that model states that as long as a society has extra laborers in the countryside, they can move to much more high productive industrial work, while keeping wages low and not hurting agricultural production. China’s rapid economic growth over the past 30 years has in many ways followed this model. Yet with rapid increases in wages for factory workers and others, it seems clear that China has moved towards a situation in which it no longer has rural surplus labor. In other words, China has reached the Lewisian turning point, which implies that it will have to find growth in other ways.

One possible path could be seen in discussions over changes in the way that China urbanize. The regime has consistently promoted small and medium cities over large ones. Since the beginning of CCP rule in 1949, the regime has worried about urban instability—and from the regime’s perspective rightly so, since nondemocratic regimes with single dominant cities are much more prone to collapse than those facing a number of different cities. This is counter-intuitive for those who know Chairman Mao’s famous saying that a single spark can start a prairie fire. Mao, of course is right, a single spark can start a prairie fire, but it is much more likely that a prairie fire will start when many sparks are concentrated in one space. The regime has dealt with the possibility of urban unrest by biasing its policies in favor of cities, and when this bias led farmers, especially in the 1950s, to “blindly flow” to favored cities, the regime limited the ability of farmers to migrate. These migration restrictions, referred to as the hukou system, have been reformed but remain barriers to those born in the countryside interested in moving to cities. These restrictions have been lowered for smaller cities, but the walls outside of larger cities remain tall.

It has been suggested that the regime believes that it needs to encourage growth in its largest cities now to promote innovation, creativity, and productivity despite the potential dangers of urban unrest that might arise from having so many crammed together so closely to each other and the seats of economic and political power. This debate can be summarized by two different Chinese phrases that translate to the English “urbanize”: chengshihua—urbanization of cities and chengzhenhua—urbanization of towns. It appears possible that China will move away from the latter towards the former.

It is believed that this transition towards developing larger cities will also encourage a shift towards consumption and away from investment and exports as the principal source of Chinese economic growth. It is well-known that the Chinese economy is particularly dependent on selling its goods to others and investing resources for its future to achieve the high rates of growth that have been the dominant economic fact about China for the past decades. Yet this too seems to be changing. The Great Recession or Global Financial Crisis is a study in contrasts on this point. When the Chinese regime was hit by the dramatic drop in export demand it replaced this external demand for Chinese made goods with internal demand through a massive stimulus package. This did two things: first it showed that the world is not enough; that is, China could not depend on the rest of the world’s demand for its goods to continue its growth. Second, by investing incredible amounts of resources in additional infrastructure, the regime realized that it needed to shift its economy away from such investment quickly less even more uneconomical projects, white elephants or bridges to nowhere and the like, were constructed. However, promoting consumption has been difficult and run into its own problems. As millions upon millions of Chinese bought their first appliances and cars, the environmental consequences of such consumption have made themselves known. If the fundamental social contract that the regime operates with is a trade-off of growth for stability, many Chinese are wondering whether growth has anything for them. What good is a car if one is stuck in traffic and unable to drive anywhere; or an apartment in a city with air-quality so pitiful that simply walking around outside is dangerous?

So, it is clear that China has reached a turning point. Indeed, I would argue that it has reached many of them at almost the same time. This makes predicting where China will be headed a very challenging task. Last year, the World Bank, jointly with the Chinese State Council released a very interesting document entitled: China 2030—Building a Modern, Harmonious, and Creative Society. I would argue that it presents a best-case scenario of where the country is headed. The chapter titles of the report make this optimism apparent: Green Development, Increasing Innovation, Strengthening the Fiscal System, Achieving Mutually Beneficial Relations with Other Countries, and so on… What is missing from that document is politics. The Chinese Communist Party is never mentioned as an important actor and social stability is assumed. China faces many turning points in the next few years; the question is whether China will navigate them safely and what paths will the country, party, and people be on at the end of this wild ride.

Thanks.

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The previous speaker, He Mingke of BTBU, had mentioned China’s political difficulties with minorities obliquely during his presentation, which led me to expound a bit on how the Great Recession was part of the spark for the Urumqi riots of 2009.

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