“China in Transition”
By Sheridan Prasso
strategy+business | September 19, 2011
China’s burgeoning middle class has been a powerful source of political, social, and economic stability . . . But pressures on the Chinese middle class are increasing as well: Inflation is rising, a property bubble keeps young families from buying real estate, and a large number of college graduates are unable to find jobs.
All this is putting enormous pressure on China’s leadership, says Cheng Li, a political scientist from Shanghai who is director of research at the Brookings Institution’s John L. Thornton China Center. . . . Li was in New York in May to speak at a conference organized by the Committee of 100, a nonprofit focusing on U.S.-China relations. . . .
S+B: Can the world’s resources handle 1.3 billion increasingly active Chinese consumers?
LI: The rise of the Chinese middle class is a mixed blessing. As China transitions from an export-led economy to a consumption-led economy, the global environmental and ecological implications will be overwhelming. But I think the Chinese government should avoid [encouraging] today’s progress at tomorrow’s expense. For example, if China continues to adopt a model in which every family owns a car, it would be a huge [environmental and infrastructure] disaster for the country, with repercussions for already strained resources that could be felt around the world. . . .
S+B: What are the primary challenges affecting the middle class?
LI: . . . If the property bubble bursts, it will directly hurt millions of middle-class Chinese, and the economic growth chain will be broken. Chinese leaders acknowledge that, but the bubble still cannot be controlled. They proposed a new property tax on the middle class. The middle class will probably revolt politically if that happens. This dilemma is really destabilizing for China’s sociopolitical situation. If you do not have a tax, the property bubble will probably continue to grow. But if you tax, you will hurt the middle class. It’s a difficult policy choice.
Another important challenge is unemployment. In the last few years, about 20 to 30 percent of China’s 6.6 million college graduates have not been able to find jobs. Of today’s middle class, 70 percent had parents who were farmers, and for around 55 percent of middle-class Chinese, their first job was as a farmer or manual laborer. This has been a story of upward social mobility. But now [without economic reform and increasing upward mobility], the middle class will shrink.
S+B: What effect could this have on the political system?
LI: The middle class wants to have freedom of the press, but China has severe censorship. Also, China is now moving toward greater innovation. For innovation to take hold, you need to have a spirit of freedom, but in China this is lacking. Civil society in the U.S. can share the burden of governance with the government and other interest groups, but the government in China has repressive policies toward NGOs, domestic and foreign. So fundamental change is needed in the political arena. . . .
S+B: What should Western executives keep in mind as this transition continues to unfold?
LI: This is a tremendous opportunity. We’ve already seen China become the number one market in automobiles, and the number two market in luxury goods. The middle-class lifestyle is wonderful news for foreign companies. But they have to really look at the Chinese market. Last year, the top two fastest-growing areas of consumption in China were surprising. Number one was religious tourism, because China never had this tradition before. The second-largest was pet care products. . . .
. . . China will not collapse, as some have predicted. Its development will not be linear — there will be ups and downs. It’s dangerous to think that everything is good. But if you think everything is bad, you will miss opportunities.
Read the full interview.