The state newspaper China Daily has prominently listed China’s challenges under the rubric of the Nine Important Task for 2014. The list, which certainly includes some of the key policy requirements, just as certainly omits others.
Deeper reforms are clearly accepted by most people as essential. However the list is rather limited. Reform of the tax system is good. We certainly need more people to pay tax. China’s tax base is too small and its revenue tiny for the size of its economy. An open and transparent budget system is an important requirement. The Open Budget Initiative in 2013 rated China’s budget at 11% for transparency. An open budget is vital to encourage scrutiny, discussion and thus accountability. Liberalising interest rates would be a good move. However it is particularly important in the less discussed sense of equalising the interest rate charged to private and state enterprises. The cost here is that many state enterprises may then become loss-making if this subsidy is removed.
The Shanghai Free Trade Zone is mentioned. While Shanghai can continue building a successful trade zone, a finance centre is quite different. It doesn’t only require tall buildings. It requires such features as freedom of information, an independent legal system and free access to markets by global intermediaries. Shanghai is unlikely to become a global financial centre quickly.
It is generally accepted that the economic engine needs to cease being driven by investment and exports. The options are domestic demand or innovation. There are household savings to unlock but they will not be as available as is desired until several essential social factors are addressed. For example, healthcare must become affordable or insurable, pensions need to be more generous and widely available. Cultural issues such as dowries, ‘bride price’ and a bridegroom’s need to possess an apartment affect families’ savings patterns. Meanwhile we have to prioritise innovation.
Modernising agriculture is mentioned to ensure food security. Well, it is not obvious that China’s mercantilist fixation on controlling its food supply is sustainable. Modernisation should include more mechanisation, but there are too many smallholdings and farmers don’t have the money – it should be noted that in modern China 41% of farm work still does not use machines. Mortgage rights would be helpful and the right to rent or sell to create consolidation. However there are political and financial constraints to swift modernisation of farmers’ land rights, although more rights are mentioned.
Ensuring that arable land stays above the ‘red line’ of 300m acres has been policy for decades. It seemed recently as if grain policy reforms would result in a more practical food production policy. With rapid urbanisation, fertile arable land is regularly replaced with less fertile land in remote inhospitable areas in order to maintain a nominal acreage of ever less fertile land requiring ever growing quantities of fertiliser which then poison the rivers and coastal waters. It is unfortunate and even damaging that this ‘red line’ is still government policy.
Government-sponsored rapid urbanisation has many negative consequences. Here it is proposed to quickly redress the unfairness of rural migrants in the cities having only limited access to social services such as schools and hospitals. We should remember that there is a reason for such seeming unfairness. Beijing’s leaders are well-aware that the urban middle classes do not want their limited social facilities swamped by 260m city-based rural folk. Until a more extensive roll-out of social facilities can be funded, their political antennae will probably restrain them from large-scale acts of generosity.
Greater focus on innovation and permanent cutting of surplus production capacity are advocated. Both are highly desirable. The first needs change to the education system to encourage greater critical thinking. The second will likely be bedeviled by a plethora of vested interests.
What China needs is a society with more equal opportunity rather than an egalitarian society. However the inequality is now very high. A university, sponsored by the central bank, estimated the GINI coefficient (which measures inequality: the higher the worse) at 61, making China one of the world’s most unequal societies.
Proposals include reversing the steady reduction in rural students at university and suggesting that universities have more flexibility in admissions. The two are not necessarily mutually supportive. Parents hoping to see the dreaded gaokao university entrance examination replaced are nonetheless nervous of seeing a more liberal entrance system as they fear it would allow more opportunity for the children of officials and their friends. It is not surprising that rural students have been ebbing from the universities. Rural education expenditure is lower than urban. Secondary education is rife with requests for unofficial “fees”.
It refers to the expected growth in graduate numbers. After a rise from 800,000 a year to over seven million and now a likely over 30% real graduate unemployment, the last thing China needs is more graduates. The solution is probably to close a third of the universities, increase spending on education in the rest and start teaching vocational skills that the economy requires to the non-university young.
There is a welcome – and rare – admission that smog, environmental pollution and desertification are all increasing. Usually any commentary is cloaked by obfuscation. The first step in the battle against these hazards is transparency to allow public monitoring. Government policy against desertification has hitherto relied on a long term afforestation programme which is the largest such in history. Unfortunately the results have been tenuous and new measures are needed.
The analysis of problems is generally very relevant. There is a degree of frankness in the description. However, many of the issues need different solutions and enhanced urgency.