FEATURE: China's challenges

Shifts in savings, population, popular expectations and economic priorities are just some of the problems China will face in the coming decades.

Radio Australia's associate editor for the Asia Pacific, Graeme Dobell takes a look these challenges and what effect they will have on the Middle Kingdom.

Graeme Dobell

Last Updated: Tue, 3 Aug 2010 13:33:00 +1000

As China continues its global ascendency, the rest of the world is adjusting, in all aspects of political and economic life.

The impact is being felt in world trade and output, world prices, international capital flows and financial markets, and on environment and climate.

On the world stage, China is moving from being a regime taker to a regime maker.

China spent much of the last decade of the 20th century as a regime taker, negotiating its way in to the World Trade Organisation.

A decade on from joining the WTO, Professor Ross Garnaut, one of Australia's top experts on China, says the country is now being asked to help design and run the international system, not take it as a given.

"In the modern world, the world and China cannot afford to have the world's biggest economy as a regime taker, because too much is at stake and it is not obvious who else will provide global leadership," he said.

"China has got to be part of building the international system in which it will make its way."

As China's political clout grows, it will face opposition from other countries.

Professor Woo Wing Thye, from California University, says China knows it faces growing resentment, questions and suspicion from the United States.

He says one major problem is that China itself hasn't quite made up its own mind how to apply its new power and global standing.

"I think China's...confusion lies in that it wants to operate on both levels, being a regime taker of the conservative type at the international level and being an increasingly aggressive regime maker on the regional level."

Professor Woo says China wants to control and direct the emerging power structure in Asia, but is conservative on the broader international stage.

He says China does not want any changes in the status quo in the United Nations, in the multilateral trading system or new global compacts such as one on climate change.

"China's attitude is on that is like leave me alone, let me get rich first and then I will help you on all the other global materials."

Climate challenge

As the world's biggest carbon emitter, China is a key part of the problem of climate change as well as the solution. China's climate change contradictions were central to the failure of the UN Climate conference in Copenhagen in December.

According to Professor Woo, China's approach to Copenhagen displayed a lack of diplomatic sophistication.

"The absence of Hu Jintao from the final session of the Copenhagen summit, it certainly reviews such a misunderstanding about China's role in the world and of what people expect China's contribution to be," he said.

Professor Woo Wing Thye says environmental issues also pose power problems on both a domestic and international level.

China will have to satisfy international demands to mitigate its carbon emission as well as achieve domestic targets set by the government - which has promised to achieve a 40 to 45 per cent reduction in carbon emissions per unit of GDP by 2020 compared with 2005.

In the next twenty years, China is set to become rich as its world's largest economy, and Professor Ross Garnaut says that means China must accept the responsibilities that go with success in confronting climate change.

He says the challenge for China is to look beyond its own affluence to see how it's global economic interests would be harmed by climate catastrophe.

"The really big consequences of environmental catastrophe for China are likely to come through global climate change, rather than through anything in China," he said.

"All the local environmental problems are being addressed at a relatively early stage of China's process of income growth, because people want them corrected. But one country alone cannot cure the world's climate problem."

Ageing population

China will also have to confront the challenges posed by its ageing population.

The country has become the world's factory because of its huge reserves of surplus labour - but within the next 15 years, China is heading for a turning point where it no longer has that surplus.

Professor Yao Yang, from Peking University's National School of Development, says China will also have to deal with a population that is much older.

"Quickly enter an ageing society and China has to face the problem that Japan is facing today," he said.

"This is almost certain we are going to face those problems. In 15 to 20 years my generation will become like 65 to 70, that's the highest point of China's ageing issue I think because we are the generation of baby boomers and late 1960s."

China has little experience of having lots of old people in its population mix. In 1970, only 54 million of its people were aged over 60. But by 2050, China is projected to have 440 million people over the age of 60.

China's ageing population is attributed to the country's rapid decline in its mortality or death rate in the 1950s, followed by a rapid decline in the birth rate in the 1970s because of the one child policy.

The change in the makeup of the population will challenge the Chinese economic model that has had such a huge impact on the rest of the world.

ANU economist Dr Jane Golley says over the next decade, China will head into period where surplus labour is a thing of the past.

"This surplus labour story has been a major driver in China's economic development," she said

"That has come about because of the structure of its population, a very large proportion of it engaged in the workforce, and even that a consequence among other things of the one-child policy and of economic development."

"Fast forward 20 years into the one-child policy and we now have an ageing population that is ageing more rapidly than any of the developed countries have experienced in their own development paths," she said.

"So by 2015 you see the labour supply growth, the labour force, basically the growth of the labour force becoming negative in China, so that clearly, a shrinking labour force puts upward pressure on wages."

Savings mountain

But China can rely on the massive accumulation of wealth - the savings and investment mountain - to meet the needs of its ageing population.

As China's huge pool of surplus labour slowly starts to shrink because of demographic change, more profits or cash will shift from investment to wages.

Professor Ross Garnaut says demand for workers in China in the coming decade will drive a real lift in wages.

He says will reverse what has been the long term trend for wages to fall as a proportion of China's GDP and therefore China will start to run down its savings mountain.

Professor Garnaut says the United States will slowly get what it's demanding from China - an increase in domestic consumption - but will not like the result.

"There's likely to be less Chinese surplus savings available for international investment," he said.

"Some US congressmen for a moment will cheer, but not so much when that immense US public debt, 100 per cent of GDP has to be funded at substantially higher interest rates," he said.

"And taxes have to rise in the United States simply to fund the interest commitments because the US government can't default, so that's going to be a big part of the story of the next 20 years."

At the moment, China's monetary policy is one of the major sore points in China's relationship with the United States. Washington is demanding that Beijing float its currency, or at least lift the value of the yuan.

But China though is in no hurry to change the policies which have built its savings and investment mountain.

Professor Woo says China wants to catch up with the developed world as quickly as it can which is why China is saving and investing at almost unprecedented levels.

He says China interprets many of the calls to change its economic policies as advice to slow down in the race to get rich.

"To tell China to eat more and invest less is to tell China to catch up with the rest of the world slower. It is not possible to grow at the same rate as before if you invest less than before, because growth means expansion of production capacity," he said.

"Unless there's a technological breakthrough that allows China to produce more with less capital, that is not possible. So what is...the one thing that has consensus in Chinese society? It's to catch up with the rich countries."