Sixty years on, a growing divide

Addressing a widening gap between the cities and the countryside is China's most pressing challenge.

Much of Beijing has come to a standstill in the lead-up to China’s 60th anniversary celebrations on October 1.

But its construction sites have not, and the hammering and drilling has not stopped for a second. Chen Liu, a wheat farmer from remote Shandong province, takes a break from a morning spent lifting bricks, lights up a cigarette and stares at National Day shoppers with their glitzy shoes and designer bags. “It’s a different world here,” he says. “Even the cigarettes cost too much.”
Mr. Chen (23) is one of 225 million migrant workers who have left China’s interiors in search of work in cities. In the three decades since the country’s “opening up”, prosperity has come to urban China, but so has a widening income gap between urban and rural areas.

The per capita income of an urban resident is now 3.3 times that of a rural one, the biggest gap in the country’s history. Rural Chinese make up 55 per cent of the country’s 1.3 billion population. Addressing this widening gap is the People’s Republic of China’s most pressing challenge as it marks its 60th anniversary, scholars say.

In recent years, the Chinese government has passed a number of measures aimed at addressing the inequality between the rich coastal areas and the interiors, including investment in health, reducing agricultural taxes and massive investment in infrastructure through a “Go West” industrialisation drive.

But laws that continue restricting migration from rural areas to cities have worsened disparities, experts say. China’s “Hukou” (literally, family population) system, a legacy from the days when the country had a centralised, planned economy, regulates migration by determining access to social services. For instance, people with rural Hukou identities like Mr. Chen do not enjoy the access to the same social services that other Beijing residents do.

“There is a growing consensus that encouraging migration, and not restricting it, is the only way to effectively address interregional disparities,” says Lu Ming, a professor at Fudan University. Mr. Lu is part of a group of scholars who have proposed a joint reform of both land laws and Hukou rules to ease restrictions on migration. Signs are the government is listening. Last year, China passed a landmark land reform law to boost rural incomes. The law for the first time allow farmers to sell their land use rights. Land is leased to farmers from the government on 30-year contracts. The move will also significantly raise productivity in rural areas by increasing the size of land holdings.

Mr. Lu and his colleagues are calling for a “package reform” which will allow coastal cities to take up more farm land for non-agricultural use; provided they provide migrant workers with Hukou status. The buying of farmland is currently tightly regulated, given increasing incidents of unrest in rural areas tied to farmers losing their land. The new land reform law allowed Liu Tie Chuang (52), a peanut farmer from Henan, to sell his land rights and move to Beijing to find work.
He earns around 1,000 Yuan ($147) every month on a construction site, twice his income as a farmer. But others are more reluctant to move, as they lose their social security benefits, from education to healthcare, and often work in tough conditions.

Changing one’s Hukou identity is arduous. Usually, a migrant worker has to work for 15 years in a city before he gains access to services. Earlier this year, Shanghai passed a law aimed at making this process easier, reducing the time to seven years. But only 3,000 workers out of more than a million qualified as the regulations also required mid-level education qualifications.
“The rules are simply too restrictive,” Mr. Lu says, “and continue to deny millions access to basic social services.”

The Hindu

How real is China's revival?

The long-term impact of the pattern of China's post-stimulus growth is worrying economists.

Economists in China are growing worried about the country’s current pattern of growth and debating a very fundamental question: how real has China’s revival been? When China announced in July the country had recorded close to eight per cent growth for the second quarter of this year in the middle of the worst downturn the country has faced in decades, the news was widely read by the media as China conquering the recession. In a year when many of the world’s major economies will contract, China is on course to meet its target of 8 per cent growth, a fact that has led many to suggest the country’s revival may lead the rest of the world out of the economic gloom.

But here in China, contrastingly, the reaction to the country’s recent growth figures has been far less celebratory. Economists are pointing out with increasing anxiety that the 7.9 per cent growth was only made possible by record Government lending and massive investment in infrastructure which compressed three years’ worth of projects into nine months. Now, nine months after China’s $586-billion stimulus plan went into action, many economists here say this success may have come at worrying long-term costs. It is becoming increasingly evident that the massive pumping in of money, which fuelled the revival, is now creating ominous bubbles in China’s stock and property markets. The first half of this year saw lending on a scale never before seen in history: in six months, bank lending reached a huge 7.4 trillion Yuan (about $1.1 trillion).

“If you pump in that much money, and it has been pretty indiscriminate, two or three years down there is potential for massive hidden bad debt in the system,” says Mr Tom Miller, an economist with the Beijing-based Dragonomics research firm. “This is clearly not sustainable in the mid term and long term.” Fears of many of those loans going bad are growing, as evinced by the wild fluctuations seen in the Shanghai stock market in recent weeks. There is confusion among investors on a very fundamental question: how real has China’s revival been?

Analysts say as much as 20 per cent of the new lending sanctioned by the Government this year went straight to the stock market, fuelling a speculation bubble of the kind China has never seen before. The Shanghai stock market showed a remarkable 70 per cent rise in 2009, but growing concerns have seen it plummet this month by 20 per cent. The property market too has been soaring with new lending, and transactions are already back at pre-downturn 2007 levels. “There is just so much liquidity in the system,” Mr Miller says. “There are signs of a bubble, but we just don’t know if we’ve reached there yet.”

China’s policymakers faced a clear choice in crafting the country’s response to the downturn: addressing short-term employment concerns or tackling the long-term question of moving towards an alternative pattern of growth that is less export-reliant. The last year has seen the closing down of more than 100,000 factories whose life-blood was the export demand from the US and Europe. Exports are now down by more than 20 per cent from last year, and the collapse of export-driven industries has seen an estimated 20 million migrant workers lose their jobs and head home.

Beijing’s focus so far has been to address this employment crisis and prevent the spread of unrest, with the People’s Republic of China preparing to mark its 60th anniversary in October. The Government responded to the crisis by pumping in money into the economy to create jobs, but its response, some say, has made an already growing over-capacity problem worse. “The problem is that loose monetary policy is exacerbating the imbalance that China needs to work through, since most of the expansion is being directed at investment in expanding current and future capacity,” argues Beijing-based economist Mr Michael Pettis.

“But this comes at the cost… of constraining the future growth in domestic consumption. Without rapid future consumption growth … I just don’t see how China can support rapid GDP growth once the huge fiscal push becomes unsustainable and runs out of steam.” Economists say it is too early to say what the long-term impact of the country’s current growth focus will be, but the general consensus is the current revival more reflects a short-term papering-over-the-cracks rather than a sustainable solution to the fundamental problems facing China’s economy. The response so far, if anything, has taken the country in the opposite direction of solving its problems.

As a recent report by the McKinsey Global Institute on China’s growth patterns argues, the government’s response, while “highly successful in restoring short-term growth,” has risked “aggravating structural distortions” that made China’s export-reliant economy so vulnerable to external shocks in the first place. These concerns have led economists to call on the government to slow things down, but there are no signs that Beijing has any intention of doing so with the National Day celebrations looming. Premier Wen Jiabao has frequently declared in recent weeks China will “unswervingly” stick with its current loose monetary policy and emphasis on addressing the employment problem.

Government economists have defended the policy by saying they expect exports from the West to revive sometime next year – an expectation many economists doubt, saying a return to pre-downturn export levels would take at least three to four years. A drop in lending in July to 356 billion Yuan, down from 1.5 trillion in June, has led some economists to suggest Beijing was heeding their advice and beginning to become concerned over the pattern of growth. But others say the fall in lending was purely cyclical with most loans usually issued in the first half of the year and there will likely be no change in the government’s focus for the time being.
“For a moment, if the government were to choose between managing the asset bubble and consolidating the economic recovery, the government would definitely choose the latter one while making compromises with the bubbles,” Mr Jerry Lou, a Hong Kong-based strategist at Morgan Stanley said recently. Mr Lou said the government would likely carry on with its loose monetary policy, despite the fears of bubbles, at least until the middle of next year.

Echoing what most economists have argued, the McKinsey report says China, in the long-term, will have to drive the economy more from domestic consumption rather than its current export-led growth. Doing so, however, would require substantial structural changes that will require painful short-term costs. To begin with, China would require massive investment in healthcare reform, given that healthcare costs are the biggest drain on private spending. The report forecast that China could realistically hope to increase private consumption’s share of the GDP only “if policy makers depart from the current development paradigm and embrace new policies.”

But in the last 12 months, there have been no signs to suggest such a shift is imminent. Much of the money released by the stimulus plan has, in fact, found its way to state-owned industrial enterprises, which are, for the first time since China’s opening up, now growing at the expense of private companies. Employment in China’s famously inefficient state-owned companies has increased in the past year by 250,000. Between 1992 and 2007, employment in the public sector fell from 45 million to 17.5 million.

The motivation for Beijing’s short-term focus is clearly political. With the 60th anniversary celebration looming, Beijing “does not want to spoil the party,” as Mr Miller puts it. The last thing Beijing wants, on the eve of its grand celebration, is tens of thousands of angry laid-off migrant workers landing up at the city’s doorsteps. But what happens once the celebrations are over is anybody’s guess.

The Hindu Business Line