Special 30th Anniversary Edition
China in 2036
20 November 2006
Economist Intelligence Unit - Business China
(C) 2006 The Economist Intelligence Unit Ltd.

Anniversary issues are usually backwards-looking and self-congratulatory affairs. Most readers roll their eyes and yawn. So, in this special edition, we decided to ask our China experts to gaze into their crystal balls and offer their best guesses about what China will be like 30 years from now. Will China dethrone the US, at least economically, or will the People’s Republic break up? Will rampant pollution kill millions of Chinese in their prime, or will they be the happiest bunch of yuppies the world has known? Some of our answers may surprise you. Please read on.

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Foreign Policy
Politics
Environment
Education
Outward Investment

Foreign policy: An unfinished quest for inner peace
China’s “soft power” in the international arena will grow, but its hard power will grow faster

Chinese leaders have always been acutely aware that weak countries have little diplomatic clout. That is, economically and militarily feeble countries—such as yesterday’s China—are at the mercy of great powers. But in light of the dazzling reversal in its economic fortunes, the notion that China’s global influence will also quickly grow through “soft power”—a term coined by Joseph Nye of Harvard University—is gaining currency among Chinese and foreigners alike. The concept, in a nutshell, refers to a country’s ability to influence others by the attractiveness of its ideas, system and culture rather than by sheer coercion.

Interestingly, many Chinese leaders still subscribe to the late Deng Xiaoping’s maxim that China should not seek the “limelight” and take the lead in international affairs before it gets economically much stronger. Even so, examples of China’s growing soft power are becoming more evident by the day. The most recent was the appointment of Margaret Chan, a former Hong Kong civil servant, as the new head of the World Health Organisation. She is the first Chinese national to lead a UN agency.

A country’s hard power and soft power often go hand in hand—as with the US. But hard power is not a sufficient condition for a country to project a lot of soft power (eg, the former Soviet Union). Conversely, a country without massive hard power can wield significant soft power. The UK, for example, punches far above its weight despite its middling economy. Why? As the world’s language of business, English, for one, gives its native speakers disproportionate clout in international settings. Meanwhile, London’s strategic location between continental Europe and the US and its pulsating cosmopolitanism have enabled it to preserve—and enhance—its traditionally pivotal role in global finance.

Spillover effect

Will China be another UK or Soviet Union? The conventional wisdom is that as China continues its swift climb up the global wealth league, its economic influence is bound to spill over into other spheres. If so, that China will wield more soft power in the long run should not be in doubt—its economy is already the world’s fourth largest and holds record foreign-exchange reserves of over US$1trn. By 2036 China’s soft power is certain to manifest itself in, among other things, more Chinese nationals at the helm of the World Bank, the Asian Development Bank, IMF and the alike; a large contingent of Chinese troops in UN peacekeeping missions; and a mushrooming number of overseas Chinese language and cultural centres such as the Confucius Institutes. But less certain is the future balance between the magnitudes of China’s soft and hard power, as well as which it will choose to make greater use of.

The conventional wisdom also suggests that by 2036 the Chinese economy will have overtaken the US economy. On the assumption that China’s annual per-capita GDP growth will average 7% and that the renminbi will appreciate by 25%, Citigroup forecasts that by 2030 China will command the world’s largest economy with per-capita income of US$13,000. This seems more than plausible. China’s GDP has expanded at a double-digit clip annually for the past two decades, while the renminbi faces immense upwards pressure. History has also proven that developing countries can leapfrog developed countries if they leverage their competitive advantages and pursue sound economic policies. With its massive pool of labour, exceedingly high savings rate and close integration with the global economy, China looks very likely to become the next to do so.

That said, it is dangerous to extrapolate long-term economic growth scenarios purely based on past trends. A couple of years before the Asian financial crisis someone predicted that Thailand would catch up to France within 20 years. Today the French simply shrug and say, “imbécile!” For all that is going right for China, it faces serious challenges to continuous growth, such as an ageing population, gaping income disparity and worsening environmental degradation.

It would be equally naïve to assume that Chinese leaders will continue to adhere to Deng’s creed of self-restraint in international affairs—especially as their confidence grows in tandem with China’s might. One reason that the UK is so good at exerting soft power is because it is keenly aware of its limits and avoids hubristic overreach. The opposite is true of the US, which has recently undermined its soft power by relying too much on its awesome hard power. Alas, China will increasingly be tempted to behave more like the US than the UK.

Consider China’s relations with its neighbours. While it is true that Beijing has put its territorial disputes with Russia, Mongolia, India, Vietnam, the Philippines and Japan on the back burner, it does not mean that current Chinese leaders have forgotten about the concessions their imperial predecessors were forced to make under the “unequal treaties” imposed by stronger powers. In particular, China’s troubled relationship with Japan is almost certainly headed for some sort of “settling of the score”. China’s deep distrust of and enmity with Japan stemming from the military conflicts of the 20th century have been compounded by Beijing’s suspicion that Tokyo has been abetting the independence movement in Taiwan, a former Japanese colony. More generally, given its insatiable demand for raw materials and natural resources to fuel its industrialisation, it is safe to assume that China will become more assertive in its backyard. That is why Beijing quietly dropped the use of the phrase “peaceful rise”. The reality is that rising big powers always bully small neighbours!

China’s exercise of its far greater soft power in the future will be limited by a numbers of factors. The relatively difficult-to-fathom Chinese language is one. The gap between how a lot of foreigners see China (nervously) and how most Chinese see it (respectfully) is another. And China’s economic development, as impressive as it has been so far, is more likely than not to encounter a severe setback or two in the next 30 years. Above all, true soft power derives from a country’s inner strengths and ideals. But China still bears too many scars from its recent political history, which have eroded many traditional Chinese values and which have yet to heal completely. To truly revitalise the best Confucian principles and undo Maoism will take several generations, not a mere 30 years.

Politics: The Federal People’s Republic of China
By 2036 the Chinese Communist Party’s grip on a unitary state will only be a façade

In the coming 30 years China will split along geographic lines into a far looser political system than is currently the case. And the country’s superficial administrative coherence will, in reality, mask a number of fractures.

Following the accession of “sixth generation” politburo members in 2011, technocrats will overwhelmingly make up the senior leadership of the Chinese Communist Party (CCP). They will place more emphasis on “inner-party democracy,” which, in their own minds, will entail building up systems and institutions for a more rational and efficient administration. They will not tolerate other power centres, but will allow considerable leeway in the use of alternative administrative models under CCP control. This is why successive party leaders will trumpet vaguely defined “harmonious goals” and a consensual leadership style. But much like Japan’s dominant Liberal Democratic Party, this means sharp factionalism will be the name of the game in private.

Contradictory agendas

Behind the polished façade will lie a contradiction: the “central” government will be increasingly restrained by forces of decentralisation. Since the beginning of the market-opening era in the early 1980s, the leadership in Beijing has relied on consensus among provincial leaders concerning the pace of reforms and burden-sharing for the social costs imposed by economic change. But efforts at tax-sharing agreements and transfer payments will degenerate into a series of debilitating political struggles for Beijing. This will inexorably alter the balance of power in favour of provincial bodies. Such changes, though, will be incremental and the result of crafting specific political bargains. These exercises will, in turn, be both reinforced and exacerbated by factionalism. Favouritism within the politburo will exploit regional loyalties, university alumni networks and the increasingly intertwined linkages among the corporate and political elites.

There will be nothing like a constitutional conference to debate the political framework of this new China. In truth, however, the tradition of ad hoc arrangements will be convenient for not only the provinces, but also the Special Administrative Regions (SARs) of Hong Kong and Macau, as well as the de facto SAR of Taiwan. Throughout the reform period, there have been several precedents for the decentralisation of political power: China’s five Special Economic Zones (SEZs) have been given legislative authority akin to provinces in the early 1990s, and have successfully “piloted” legislation for a number of corporate-sector reforms.

In a more imaginative application of creative ambiguity, the province of Fujian will pioneer the use of “free trade investment zones” with their boundaries extending to include airports and ports in both Fuzhou and Xiamen. By thus dispensing with the semantic obstacles posed by the use of national or even provincial designations, direct cross-Strait flights and cargo shipments at last will be authorised. Beijing, Shanghai and Guangzhou, too, will soon follow Fujian’s example and incorporate their airports into existing free trade zones, thereby facilitating direct links to Taipei and Kaohsiung.

The flip side of such economic decentralisation will entail the off-loading of social obligations, such as education and healthcare, to sub-provincial levels of government. Despite the “harmonious society” policies initiated by Hu Jintao—the Chinese president from 2002 to 2012—and the subsequent attempts to consolidate and standardise provision of public goods, their delivery will remain mostly in provincial hands. The central government will have some success unifying funding options, but its traditional tolerance for discrepancies in standards of governance among localities will only grow.

Regions, naturally, will champion different issues. For example, some will emphasise greater environmental protection. Others, such as Xinjiang and Tibet, will stress mother-tongue instruction in the school system. These differences will become particularly apparent at sessions of the National People’s Congress, during which provincial caucuses will engage in spirited lobbying of central ministries.

In 2036, as in 2006, the Chinese government’s mantra will be preservation of the status quo. But it will not be able to preserve the status quo at all. In fact, incremental tinkering in the centre-periphery relationship will make the balance of power even more lopsided and differences in governance at the provincial level even more pronounced. Formalisation of a new centre-periphery power-sharing arrangement will be discussed with more frequency and urgency within Zhongnanhai. But no consensus with China’s 31 provinces and regions will be reached.

Numerous think-tank conferences on the topic of federalism will get bogged down on the knotty issues of the treatment of the SARs—and the precedent that would be set by absorbing them into the Chinese political system while at the same time according them special status. Hong Kong’s “high degree of autonomy” is due to expire in 2047, and the politburo will be keen to transform Hong Kong’s de facto economic convergence with the Shenzhen SEZ into a de jure accord. Similarly, Taiwan’s effective surrender of full sovereign claims—through its participation in free-trade zones and preferential customs arrangements with the mainland—will need to be normalised in a comprehensive agreement according the island “autonomous” status within China.

Re-defining Beijing’s asymmetrical balance of power with its various dependent jurisdictions will require political maturity to conceptualise possible solutions and political will to implement them. Whether Beijing and the provinces are up to this task will be of decisive consequence to China’s political evolution through 2036—and well beyond that.

Environment: Saying “no” to growing filthy rich
China will be a (relatively) cleaner place 30 years from now

China’s economic rise represents one of the most potent challenges to the environment that the world has ever faced. Environmentalists fret, for example, that if a more developed China produced urban waste at the same rate as the US does today, there would be 3bn tonnes of the stuff every day. This prompts many to call on China to find a “new paradigm for development”, lest its quest for a better-off society ends up trashing a big chunk of the planet. But comparisons with developed countries in 2006 and extrapolations of existing trends probably present a very distorted picture of China’s environment in 2036. In many ways, China will be a cleaner place by then.

Changing priorities

The fundamental problem with extrapolating current trends into tomorrow, is that China’s government has only recently begun to pay attention to environmental issues. In the 11th Five-Year Plan (2006-10), the government has emphasised, for the first time, the need to strive for quality as well as quantity in output. Environmental goals, such as more efficient power and water usage, have been instituted. A renewable energy law came into effect at the start of 2006, mandating power generators to buy from renewable-energy producers. The State Environmental Protection Agency, only raised to ministerial rank in 1998, has also gradually been given more teeth and muscle.

One can take a cynical view of how effective all this will be—in the short term. Energy consumption outpaced GDP growth in the first half of 2006, making a mockery of the target of reducing the amount consumed per unit of GDP by 4% this year. But in the long term, growing pressure from local and international sources will keep the focus on environmental matters, and this will inevitably lead to some change for the better. Already, incremental but significant steps are being made, such as the government’s levy on electricity sales, which goes towards supporting the development of renewable energy.

The most obvious improvements will come in two areas: water and desertification. Arguably China’s water supplies could not get any worse than they currently are—around 90% of urban underground water is polluted, as are 70% of China’s rivers and lakes. Partly because the situation is already so dire, water pollution will be a priority for the government and, happily, progress in the next 30 years will be relatively easy. Treatment of urban sewage will rise rapidly from the current level of 52%. And tougher enforcement of environmental regulations will persuade a growing number of firms to invest more in waste-water treatment systems. While China’s pungent waterways in 2036 will not be at risk of attracting hordes of recreational swimmers, the majority will be substantially cleaner.

The scourge of spreading deserts will also likely pose less concern in 2036 than it does today. The pressure on China’s rural areas will ease as more Chinese migrate to the cities, turning the country from a rural-majority to an urban-majority one. Some might argue that the benefits of fewer farmers could be offset by more intense usage of the land. But this trend, in turn, will be offset by the simultaneous retreat of government support for farming in the most marginal agricultural terrains, which will encourage farmers to concentrate in more fertile regions. This process is already underway—by the end of 2005 around 23m ha of infertile farmland had been returned to woodland or grassland.

China’s environmental future is not all gleaming, however. In some respects, the country will be more polluted than ever in 2036. For example, it is almost impossible to envision a substantial improvement in air quality without some unforeseen technological leap. Even if China’s economic base shifts from energy-intensive industries like cement and smelting towards less polluting services sectors, or even if the government manages to make China as energy efficient as Japan, it will require a lot more energy. The Economist Intelligence Unit’s current forecast is that China’s GDP will be well over three-times as large (in real terms) in 2036 as it is this year. The power needed to fuel this expansion will undoubtedly come mostly from coal. The country is thus likely to see a steady deterioration of air quality and a steady rise in acid rain and greenhouse gas emissions. Surging levels of car ownership will also see urban air pollution rise to choking levels.

The most important challenge for China will be enforcing its environmental regulations. Progress will depend on establishing an independent judicial process and actively engaging China’s civil society. Fortunately for China and for the outside world, the indications to date suggest that the environment will be at the vanguard of reforms pushing the country towards both these goals.

Education: More is better
China will produce millions of new university graduates who will be generally smarter, wealthier and happier

Disparities are entrenched (or embraced?) as a way of life in China. Nowhere is this more apparent than in the classroom. Even 30 years from now, at rural schools, the chalk and blackboard will remain the primary teaching prop. At city schools, though, the palmtop computer will be taken for granted. The iron-rice-bowl egalitarianism of the pre-1979 era will only get a brief mention in a course on history—not a popular subject, incidentally, for China’s über-achievers obsessed with a more brilliant future.

As China’s economy grows bigger and races up the value chain, will its educational system be able to supply the armies of qualified workers the country needs? The short answer is yes—with a lot of help from the private sector. Many more Chinese university students will be trained at tertiary institutes set up by private business and home-grown philanthropists. By the end of the 16th Five-Year Plan (FYP—2031-35) Chinese universities will be producing about 8m graduates each year, or about 1% of the workforce.

With government expenditure on education peaking at 4% of GDP under the 11th FYP (2006-10), the private sector will shoulder the extra spending demand. These private institutions of higher learning will be more in tune with economic demands than the traditional state-run universities. This will result in twice as many privately funded universities with full undergraduate courses as state-run ones, compared with the 1:20 ratio in 2006.

Following in the footsteps of Beijing Geely University, every leading enterprise (numbering about 100) in the country will operate an institution of higher education. They will generally offer a curriculum patterned after Ivy League schools in the US. These enterprise universities focused on teaching directly relevant skills required by the job market will be more sought-after than many joint-venture campuses set up by China’s traditional academic institutions and their Western counterparts.

Always flexible, the country’s erstwhile party schools—funded by a club of 100m-strong well-heeled “communists” who were the first to be allowed to get rich—will aim to offer the world’s best MBA facilities at well-manicured campuses equipped with five-star restaurants and hotels for teaching staff and students from all over the world. These schools will also operate the highly popular Confucius Institutes, first set up in 2004 in South Korea, to promote Chinese language and culture to foreigners. Students will be drilled in the core Confucian philosophy of social harmony, collective responsibility and, most importantly, respect for authority. Foreign governments besieged by religious terrorism and ethnic unrest will find it especially useful to send their bureaucrats to China for such an education.

No thanks to humanities

The privatisation trend will reinforce the country’s bias in favour of science and engineering, as product innovators and infrastructure builders continue to attract great market demand. China will remain the single largest supplier of engineers in the world with some 4m graduating in the discipline each year, compared with a paltry 120,000 in the US. But the US will still lead in technological innovation, as the country’s liberal environment continues to inspire a gaggle of geeks in both the classroom and the garage.

With 25% of Chinese workers university-educated by 2036, generating suitable employment for the 200m-strong elite force (compared with just 20m in 2005) will become a major headache for the Chinese government. It will rely heavily on the private sector to provide employment. But even the avalanche of new job opportunities in urban areas created by the “Great Migration” of two-thirds of the Chinese population (estimated at 1.5bn in 2036) into cities will not be enough to meet the needs of the country’s well-educated workers. Increasingly, they will look for employment overseas.

With considerably fewer peasants left after the great urban migration, farms will become relatively larger and farming more mechanised. Agricultural institutes, financed by private investors who see an opportunity to capitalise on a “green revolution”, will fan across the country, teaching farm management and new cultivation methods.

Despite the persistent rural-urban divide, farmers’ income levels will increase with higher-value crops and economies of scale. Mob violence will flare up on occasion, but these will be driven less by wealth disparities than by local injustices. Such actions will lack national appeal. A better-educated population, preoccupied with self-advancement, will have little interest in rocking the system.

Outward investment: Tainted money
Rising overseas investment by Chinese companies will help keep despots around the world in business longer

One less-noted feature of China’s current economic boom is the strong growth in outward foreign direct investment (FDI). In 2005 Chinese investment abroad surged by 526% compared with 2004, reaching US$11bn. With China’s economy continuing to rocket ahead, the country is certain to become a major source of investment for other countries 30 years from now. But will this be a good thing for the rest of the world?

The experience so far, especially in Africa where China has been on an investment spree, suggests that the longer-term impact will be far from positive. Indeed, China is coming under criticism from various international observers for undermining Western attempts to improve governance and reduce corruption in African countries. China, for instance, is blamed for abetting genocide and human rights abuses in Sudan. To maintain access to the country’s oil, China has refused to censure the internationally ostracised regime in Khartoum. If these are early signs of China’s future behaviour abroad, the outside world would be right to worry.

The main factor driving China’s outward FDI is its need to secure the energy resources and raw materials, such as copper and iron ore, that are necessary to fuel the country’s booming economy. With domestic production of oil stagnant, and demand forecast to grow by around 7% a year, China in particular is becoming a central player on the world energy scene. This is why, despite the unsuccessful attempt by the state-owned China National Offshore Oil Corp in 2005 to take over Unocal, a US-based oil firm, Chinese energy companies will continue to look abroad.

China’s hunger for oil and other natural resources means much of China’s future investment will flow to developing countries in Africa, Central Asia and the Middle East. However, even as China gets richer and more powerful, Western observers fear that it may continue to pursue only its narrow self-interests rather than doing its part to help solve global problems.

In Sudan, the main reason why the UN has been so slow to introduce sanctions against the country for the atrocities taking place in the country’s Darfur region is opposition by China, a veto-wielding member of the UN Security Council. Similarly, China, along with Russia, is shielding Iran from a US-led effort to punish the oil-rich country for pursuing a suspected nuclear-weapons programme. Meanwhile, in Angola, which is now China’s largest supplier of oil, there are concerns that Beijing’s few-strings-attached investment in infrastructure is undoing the IMF’s and World Bank’s efforts to improve governance in the country.

Of course, China may amend its ways as time goes by. Part of the reason why Chinese companies so often act “unethically” is due to their lack of international business experience. And the root of Chinese firms’ bad behaviour lies in weak domestic corporate-governance standards and managerial transparency. As standards at home improve, the behaviour of Chinese companies abroad should also improve.

Few good choices

Less certain is whether the behaviour of the Chinese government will change. On the one hand, “non-interference” in the affairs of other countries is enshrined in China’s foreign-policy doctrine. On the other hand, China does not deliberately set out to make allies of the world’s pariah regimes. It is just that, as a late entrant in the race to secure access to raw materials, China is often left with little choice but to invest in countries like Sudan, which have been abandoned by many Western countries.

China is increasingly keen to be seen as a responsible global power. If so, the Chinese government must start acting the part. As long as it continues to turn a blind eye on genocide and cosy up to despots like Zimbabwe’s Robert Mugabe, the rest of the world will wonder if China’s overseas investment will truly benefit recipient countries in the long term.

END ITEM