What the drive for a more just society means for Chinas economic and political future
Last fall's 17th Chinese Communist Party (CCP) Congress provided Hu Jintao, China's president and CCP chief, with an opportunity to set the policy agenda for his second five-year term, and he chose the ambitious target of creating a "harmonious society." Achieving this goal will not be easy, as Hu's plans create many apparent contradictions and are at odds with the approach taken by party leaders over past decades. Nevertheless, the "harmonious society" campaign will have a profound impact on government spending and regulatory policy-and thus the Chinese economy and investment environment-over the next five years.
Hu is asking his government to abandon its 30-year-old policy of striving for the fastest possible economic growth, regardless of the costs to society and the environment. Instead, he wants China to balance sustainable growth with a program to redress the many negative consequences of two decades of 9 percent-plus gross domestic product (GDP) growth. It will not be easy for Hu to convince the millions of officials who serve him across the country to change the way they behave and spend their budgets. These are, after all, bureaucrats who have always worked under the policy that faster is better. Faster growth in GDP, tax revenue, and job creation meant faster promotions. "Soft" criteria such as pollution and school drop-out rates rarely entered into the personnel calculus.
Before Hu can even begin to tackle the many tough problems that stand in the way of creating a harmonious society, he must first convince skeptical local governments and party organizations that his new approach makes sense. This will be as big a challenge as cleaning up China's filthy rivers and reducing rampant corruption.
Imagine that Hu has asked the policy research office of the State Council (his cabinet) to prepare an internal report explaining the "harmonious society" concept. This will be Hu's primary opportunity to convince senior party officials to put all of their political weight behind implementation of the program. What follows is an interpretation of what this State Council report might look like.
What "harmony" means for China's economy and investors
The previous section lays out the internal discussion that may be taking place within the CCP as Hu attempts to win support for his "harmonious society" campaign. The success of Hu's campaign will also be critical to Beijing's ability to manage the social and political consequences of the economic downturn that will inevitably come to the mainland during the next five to ten years.
At first glance, "harmonious society" may sound like an anti-growth policy, with a focus on the environment, income inequality, and better social services. Take a second look.
The CCP is still pro-growth, but the objective is now balanced, higher-quality growth. Hu and Premier Wen Jiabao are wiling to sacrifice a bit of speed to manage the problems that threaten social stability, but it would be a mistake to read a desire for 8-9 percent GDP growth versus 11-12 percent as anti-growth. Hu and Wen understand that strong economic growth is the foundation of a harmonious society.
Strong growth generates the fiscal revenue to pay for better healthcare and education. Strong growth translates into income growth, reduces rural poverty, and delays the day when widening income inequality becomes a serious social problem.
Heavy industry consolidation
The government's serious commitment to reducing pollution and raising energy and resource-use efficiency will, over the coming years, result in consolidation of many of China's dirtiest heavy industries. In sectors such as steel, chemicals, paper, and metals processing, enforcement of environmental protection laws will result in the closure of many smaller firms that …