Despite an Economic Slowdown, China Has a Strategy

by Reza Hasmath and Natalia Wyzycka

China has been stuck in a protracted economic slowdown, with recent evidence suggesting a grimmer outlook in the near future. The World Bank’s 2014 economic growth forecast of the world’s most populous nation has been revised to 7.4 percent with expected growth in 2015 and 2016 projected at the lower end of 7 percent. This is on the back of an economy that grew 7.7 percent in 2012 and 2013, its worst performance in more than a decade. For leaders of the Communist Party of China, this can be an alarming proposition that potentially invites unwanted risks, including the prospect of rising social discontent and increased socioeconomic inequality that will affect the poorest among the population disproportionately. Under these circumstances, the Chinese government will have to reassure the public of its legitimacy and capacity to manage periods of decreasing economic growth and potential socioeconomic consequences that follow.

Historically, there is a strong link between lower economic growth and increasing expressions of social discontent in China. This linkage is particularly acute today as one observes the rise of social discontent in the form of formal citizen complaints, anti-regime jokes, and disgruntlement displayed on social media platforms. This is most evident when examining popular microblogs where citizens post photos of state officials wearing expensive watches, or anti-censorship street protests in Guangzhou, not to mention recent flashes of inter-ethnic violence.

Disaggregated further, China’s economic slowdown points to increasing risks the Party will have to come to terms with immediately. For instance, socioeconomic inequality is on the rise. The bottom 25 percent of China’s households account for 3.9 percent of total income. This is in contrast to the top 25 percent of households accounting for 59 percent of total income. China’s Gini coefficient—an approximate measure of the national wealth gap with a range of 0 to 1, with the former representing perfect equality—also suggests a consistent trend of deepening inequality, with World Bank figures indicating 0.474 in 2012, 0.477 in 2011, 0.481 in 2010, and 0.49 in 2009.

Suffice to say, China’s slowing economy will have a stronger negative effect on the vulnerable bottom 25 percent of the population and will adversely effect certain social actors unequally. For example, this may trigger a more intensive rural to urban migration as the vulnerable, rural poor search for employment in China’s cities. This is notwithstanding a hukou system (household registration system) that attempts to curb rural to urban movement. In their host city, rural migrants will not be entitled to basic social services, and their children will not receive free education. The practical consequence of this shift is that a generation of migrant children will be forced to stay in the rural areas for schooling and may be raised without parental influence during their formative years.

Furthermore, the young urban Chinese generation—accustomed to a relatively comfortable lifestyle following the nation’s rapid economic growth in the past two decades—will encounter increasing labor market obstacles. While the official unemployment rate hovers between 4 and 5 percent, unemployment among young people is especially acute, with more than 15 percent of this cohort out of work according to a 2013 survey released by the China Family Panel Studies unit at Peking University.

Under these economic circumstances, nations generally elect to cut government spending and introduce austerity measures. However, with China’s less-than-transparent fiscal and economic policies, coupled with an obtuse political decision-making process, the state’s reaction can be perplexing and potentially difficult to unravel.

One example of the state’s reaction to the economic downturn, that can be discerned, is its approach to social welfare. China does not have a well-established social support system. The government has, for the most part, transferred some of these responsibilities to non-governmental actors. In the long-term, we will continue to see more space opening up for non-governmental organizations (NGOs) to implement social welfare programs through procurements, as well as a relaxation of regulations governing the NGO sector. This shows a pragmatic interest in adapting the existing system to provide a more secure social and economic life and deliver on basic needs to all. In this respect, the growing NGO sector sanctioned by the state has assumed some of these responsibilities and can be an effective tool to curb social discontent.

As China shifts toward a domestic-driven and service-oriented economy, a transition to a slower growth economy will become a reality. This will require the government to renegotiate its compact with citizens, which has thus far centered on economic growth as the carrot to increase the Party’s legitimacy. Progress on this front is on the horizon. For example, the government is beginning to increase transparency in reporting air and water quality in major cities, which is a major concern to everyday citizens.

Likewise, the Chinese government is attempting to increase its legitimacy through efforts to crack down on corruption, with a focus on officials that emigrated or transferred wealth overseas, and public disclosure on the salaries of executives in state-run companies. While individual anti-corruption cases are not particularly noteworthy in combating overall national corruption, it does serve as a significant signal to the general population that the government has the ability to tackle the issue at hand, and capital accumulated through illegal means, irrespective of individual social or political standing, will not be tolerated.

In short, there are signs that the Chinese government is adapting. It is increasingly concerned with the promotion of social harmony, as much as economic performance. In doing so, it will respond to the slowdown in the national economy in a manner that it is generally accustom to; namely, it will embark on a reactionary stance by promoting nationalistic initiatives, akin to anti-corruption efforts to minimize citizens’ discontent in order to retain its legitimacy and to maintain power.

About the Author

Reza Hasmath is a Lecturer in Chinese Politics at the University of Oxford. He has written extensively about China’s evolving state-society relationships, and its policy-specific implications. Natalia Wyzycka is a Researcher at the College of Europe. She has advanced degrees in Contemporary Chinese Studies and European Interdisciplinary Studies. Her current research looks at China-EU relations.

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