How serious are the challenges to China’s continued rise?

There is no doubt that since the start ofDeng Xiaoping's reform process in 1978, the Peoples Republic of China (PRC) passed through a remarkable economic development. Today, China is the second largest economy in the world (Zhu 2011: 2) and the economic growth lifted hundreds of millions of Chinese people out of poverty (Xiang 2012: 60). However, the hectic pace of change during the past 20 years has produced a range of serious challenges to the rule of Chinas Communist Party (CCP) (VanNess 2001: 15). Although, there have been many changes to the better, in terms of per capita gross domestic product (GDP) at purchasing power parity (PPP), China is ranked 94th in a list of 181 countries and can still be considered as a lower middle-income developing nation (Yang/Heng 2012: 1). Moreover, Chinese economists are deeply concerned about the future growth of the country (Yang/Heng 2012: 3).

The following essay will identify the key challenges to China's continued rise and weigh their seriousness in terms of possible negative impacts to the future development of the country. It will follow the argument that the challenges to China's continued rise are very serious and that the impressive growth of the last decades is not sustainable and led to social injustice within the Chinese society (Yang/Heng 2012: 3).

In a first step, the author will define what he understands by “China's rise”. The essay will continue with a short overview of the challenges in order to underline the dimension and complexity of the obstacles the Chinese government has to face. After that overview, the essay will go into more detail and identify the economical, social and political key challenges which may impede a further successful development. Finally, the essay will summarise its findings and provide an outlook for the years to come.

Above all, China's rise since the late 1970s can be traced back to its economic growth and the continuous elevation of its GDP. However, the economic growth model of the past three decades has almost exhausted its potential and without adjustments, a future growth is more than questionable (Yang/Heng 2012: 112-113). Because growth is necessary to further elevate the GDP, to improve the living conditions of the people and to guarantee employment that is needed to maintain social stability, the Chinese government has to reorganise its economic strategy. Continuous growth needs sustainable economic development with an increase in productivity, technological and social innovations, improved environmental conditions and efficient consumption of energy and other raw materials (Yang/Heng 2012: 114).

We can summarise that the main challenge to China's continuous rise would be the stagnation or the decrease of its economic growth. Because the economic growth depends on a variety of economical, social and political factors the challenges are multi-layered and influence each other. Inequality, dramatic social restructuring, demographic changes, environmental degradation, a poor international image, a growing income gap, water and energy shortages, corruption, the shrinking legitimacy of the CCP and the decline of social morality are just a few of those challenges (Zhu 2011: 3ff).

In the following, the essay will outline the challenges that are likely to impede a continuous economic growth of China and subdivide them into economic, social and political threats. It will identify the main challenges within those groups and explain why and how seriously they may hamper China's future rise.

Economic Challenges

China's so called ’’open door“ policy started with the reforms in 1978 and culminated in the accession to the World Trade Organisation (WTO) in 2001 (Yao/Yueh 2006: 270). While the opening brought many benefits for China, it also posed challenges to its reform path. The country was pressured to speed up with the adoption of liberal reforms and trade disputes between China and the USA and EU became a common matter of their international relations (Yao/Yueh 2006: 270-271). Moreover, the liberalisation of the Chinese economic system supported a growing income inequality within the society - a problem that already triggered social tensions and is becoming an increasingly serious threat to the rule of the CCP (VanNess 2001: 16).

Although, China has greatly benefited from opening to free market principles, its leaders managed to maintain a high level of control over the process of opening and the speed of integration with other economies. Because of that, China was able to stay out of the Asian financial crisis during the end of the 1990s and to minimise the impact of the crisis that started in 2008 (Guo/Guo 2010: 1). While the economy benefited from this protectionism, China put itself into a defensive position and provoked a wave of protectionism against Chinese made products from other countries (Guo/Guo 2010: 1). Western countries also used the crisis to complain about their trade deficits with China and accused the country of using its exchange rate as a mechanism to boost its exports while building up huge amounts of foreign exchange at the same time. China has repeatedly denied the charge of currency manipulation, but the conflict still continues (Yang/Heng 2012:2). While the EU and U.S. blame China for the trade deficits and the loss of jobs, the challenge for China is to convince them that its rise will be beneficial to all (Zhu 2011: 437). Although China cannot afford a defensive position on the global market, it has to be aware of the fact that it remains vulnerable to external economic shocks. Stagnation and prolonged deficits in Western economies can impact Chinas own growth, trade and outbound investment (Shambaugh 2011: 177). The challenge to administrate its opening to the global system is a serious task for the Chinese government. Other countries, with the U.S. and EU leading the way, will take China up on its duties and are not willing to be left standing alone with the problems of a globalised economic system. Even though China has to be careful with the implementation of liberal reforms, it can not afford to put itself into a defensive position. Because of its export orientated economic growth strategy, China relies on good trade relations.

The changing composition of the Chinese population poses another serious threat to a continuous economic growth. During the past decades, China benefited from the fact that there was a high percentage of people in working age compared to a small percentage of dependants. During the coming years this will turn into the opposite as the number of retirees will increase while the workforce will shrink (Yang/Heng 2012: 111-112).

The continuous and steady growth of the past more than two decades is no guarantee that the coming decades will witness a similar performance. An example for that is Japan, which had a record growth between the 1950s and 1990s and afterwards slid into a recession that still continues today (Yang/Heng 2012: 112). Moreover, a relatively high inflation rate forces the government to lessen its expansionary measures in order to adopt more restrictive economic policies. The huge debts incurred by local governments hamper investments even more (Yang/Heng 2012: 3).

Although there has been a housing boom since the 1990s, houses remain unaffordable for the majority of people (Zhu 2011: 11). Economic uncertainties and fragilities, inflation as well as high real estate prices have formed a classic property bubble which is waiting to burst. High property and living costs are especially sad for young people, as wages are not keeping up. Today, China shows a similar economic dynamic like the U.S. did before the beginning of the financial crisis in 2008 (Shambaugh 2011: 176) and “the potential burst of real estate bubbles may lead to a sharp drop in China's economic growth“ (Zhu 2011: 11).

The Chinese economic model lacks sustainability. It is based on cheap labour and barely existing attention to the environment in agriculture, manufacturing and the extraction of natural resources (Yang/Heng 2012: 112). The rapid industrialisation of the past decades brought along negative consequences for the environment, like a rapid increase in air and water pollution, smog and damage of the natural environment. China combines the ten most polluted cities in the world and is the world’s largest emitter of carbon dioxide. Even though China has passed environmental laws, the central government does not control all aspects of the implementation process. Because local officials prefer to concentrate their energy and resources on further economic growth, environmental mandates from Beijing are often ignored (Zhu 2011: 9-10). China faces the danger that its economic growth may be nullified by the cost to clean up the environment. If the government does not take immediate action, its natural environment will become uninhabitable for future generations (Zhu 2011: 10).

Another important issue is the problem of corruption that has reached all levels of government and the CCP (VanNess 2001: 16). It has become standard practice of government officials to abuse their power for personal benefits. Even though the majority of the Chinese does not like those practices, they feel powerless in the absence of a working legal system (Zhu 2011: 12). The main problem is the insufficient pay of employees working in government bodies. Honest employees have to take a second job in order to make their living. Those conditions support unwanted social practices as they lead to bribery, which nowadays, has almost become the norm rather than the exception. This development leads to a shrinking respect to members of the CCP as well as to decreasing confidence in the government overall (Yang/Heng 2012: 124 ff.). Due to these developments, corruption became a serious threat to China's one-party rule (Zhu 2011: 12) by impacting the regime's legitimacy, future economical development and the social stability of the country (Pei 2007: 1). According to Minxin Pei (2007), the direct costs of bribery, kickbacks, theft and misspending of public funds are at least three per cent of GDP per year. The indirect costs of corruption with, amongst others, an enhanced socio-economic inequality, efficiency losses and damage to the environment, public health and credibility of public institutions are incalculable (p. 5). “With a lower level of corruption, China would have achieved growth of a higher quality, with much less damage to the environment, economic efficiency, public health, and social stability” (Pei 2007: 5).

Social Challenges

China is an ageing society which means that the proportion of the aged population relative to the total population has constantly increased. While China's ageing population will grow steadily, the working population will drop. This development will lead to changes in economic variables such as labour, consumption and investment and may therefore seriously influence the GDP growth (Hu 2007: 167). An efficient system of financial markets that accumulates and channels capital from lenders to borrowers is one of the basic requirements for economic growth. Due to their capital accumulation, saving behaviour, labour supply and demand for different types of financial assets, demographic forces, like an increasing proportion of elderly people, have important implications for the Chinese financial market (Xu 2011: 51-53). A big proportion of elderly people is likely to have an adverse effect on the value of financial assets.

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