Winds of Change Blowing in China

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With China, it's always the scale that gets you. Not only the sheer, humungous size, but the scale on which everything has to be organised, and to some extent planned.

I am in China, in the midst of a trip around the country. If you haven't been for a few years, the change is always breathtaking. The economies of scale offer China opportunities, many of which it takes full advantage of.

As the military boffins put it, size has a quality all of its own. However, there are some cases where even the enormous size of China does not guarantee the success of a particular enterprise.

This week I took one of China's very fast trains from Shanghai to Suzhou and back. The stations at both ends were clean, well organised and efficient. The trains left on time and arrived on time. They sped along at a more than respectable 275km/h. Local business figures in Shanghai say they find the very fast train to Beijing particularly useful. There is none of the hassle of an airport. The journey involves five hours of completely comfortable work time. And they arrive in the centre of Beijing.

But here is an astonishing fact. Shanghai is a city of 23 million people. Beijing is not much smaller. They are two of the fastest growing city economies in the world, both achieving double digit growth while China's overall economic growth slips to something between 7 and 8 per cent.

However, even with these enormous economies of scale, the train does not break even financially. This does not make me condemn it as a white elephant. Rather it is part of China's determined and admirable nation building. But only a nation with a very large surplus can afford luxuries like this.

It does also lead me to one other sober conclusion. If very fast rail does not pay for itself between Shanghai and Beijing, the idea that it could ever do so between Melbourne, Canberra, Sydney and Brisbane is ludicrous.

During the days I've spent in China, on the other hand, all the policy debate has been intensely real. China is an intensely real sort of place. Its astounding economic success story looks set to continue for at least another five years. But economic growth is starting to slow. Throughout the country there is increasingly wide discussion about how China should organise its future.

The winds of change seem to be blowing, but their direction is unclear. The new president, Xi Jinping, seems an altogether more emphatic and powerful personality than his predecessor, Hu Jintao, and he is changing to some extent the nature of political leadership in China. There's no doubt that China faces huge challenges ahead, just like every other country in the world.

The question is whether the China model has run its course, whether there needs to be some new model for development, and how China might adapt to this.

One straw in the wind was visible this week. The press reported that China had reached that point at which urban businesses have to raise wages faster than the inflation rate to attract workers from the countryside. The plentiful, at one point seemingly inexhaustible, supply of cheap labour has been at the heart of much of China's growth. But wages are now rising considerably. There are several different economies. Much of China is now a middle-income economy. Some of China is a fully developed economy. Some of it is still very poor.

In third, fourth and fifth-tier cities the process of urbanisation is still moving apace. This provides its own dynamic for growth.

But the so called middle-income trap is starting to affect much of China in a specific way. As one wag puts it, China is losing jobs at the bottom more quickly than it can add jobs at the top.

At the bottom, a lot of manufacturing jobs are moving to cheaper locations such as Cambodia and Vietnam. The cost of both land and labour are much cheaper than China in those places. Chinese policy makers reply that their workers, their society, has a higher skill level and is thus more productive. But that's exactly the argument European and American policy makers deployed when China started to attract huge amounts of investment into manufacturing and thus draw those jobs away from Europe and the US.

Then there is the demographic challenge. China's work force will peak this decade. It may very well grow old before it grows rich. Given China's past fertility policies, the demographic cliff will be particularly severe for China.

There are problems in the financial sector. People talk of a shadow banking system, a network of informal loan making that has produced many asset bubbles. There is, so some economists say, a staggering burden of local government debt. Much of this debt has been used to finance infrastructure. But it's not clear that this infrastructure will always provide an economic return.

These are problems and questions, rather than indicators of future Chinese failure. Every society faces serious challenges.

One of the great things going for China is its leaders generally avoid hugely irrational decisions.

And then if you want to be optimistic the success stories are everywhere. Suzhou is a case in point. Twenty-five years ago it was a small, pleasant city. Today it is half as big again as Sydney and offers the full-scale bourgeois life style to its citizens. And it is a result of conscious policy. It was set up as an industrial zone. It certainly had its problems but it has paid off handsomely. The housing is of a good quality, the universities are superb, all manner of hi-tech companies are to be found in research collaboration with local academies. The international flavour is strong.

In other words, those who say China will continue to address its most vexing problems and continue to succeed as well as anywhere, which means continue to grow in prosperity and power, have plenty to point to which bolsters their argument.

But equally those who believe the problems are so widespread, so systemic, that China faces a major course correction, economically and probably politically, and that this will have unpredictable consequences, can also make a respectable argument.

It was wisely said that the further away from China you are, the more confident you will be in your judgment about it. Being here convinces me that no one at all knows the future of China. But we do know this. It's going to matter to us a great deal.

Greg Sheridan is the Foreign Editor of the Australian.
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