Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
As life grinds to a halt in much of the world because of the novel coronavirus, the country that until recently was the hardest hit by the deadly pandemic is slowly coming back to life. The number of new infections in China has fallen dramatically in recent weeks, and cities across the country are returning to something close to normal. Residents are coming out of quarantine, once more strolling in parks and even venturing into restaurants and coffee shops. Companies are reopening and people are starting to return to work, although authorities have banned international visitors to prevent new cases from being imported. Last month, the tech giant Apple shut its retail stores globally—with the striking exception of greater China.
Will China be a lone bright spot as other major economies struggle with the virus in the months ahead? And when the crisis finally ends, will China resume its role as the major driver of global growth, boosting the fortunes of multinationals once again? That appears to be the hope of many who have praised China for its draconian and seemingly effective response to the virus while forgetting or forgiving its initial blundering attempt to cover up the outbreak. The reality, however, is likely to be far different. After decades of annual double-digit growth, China’s economy—and in particular, its once booming consumption sector—is on a course to stall even as it recovers from its recent coronavirus-induced collapse.
Such a grim prognosis might come as a surprise after two decades of extraordinary growth. China joined the World Trade Organization in 2001, opening once cosseted industries to competition and forcing thousands of state-owned firms to merge or go bankrupt. Over the decade that followed, foreign investment jumped from $47 billion to $124 billion. Hundreds of millions of rural Chinese left their farms during this period, becoming nongmingong—“farmer-workers”—and laboring alongside laid-off state enterprise employees in new export-oriented factories. These changes unleashed a wave of productivity and together with earlier reforms that created an urban housing market, led to a rapid expansion of personal wealth. By 2012, China’s middle and upper classes had swollen to 182 million people. The consulting firm McKinsey & Company projects that by 2022, some 300 million Chinese will qualify as middle and upper class.
But the growth of this middle class alone cannot ensure China’s future. As many a multinational corporation has discovered, Chinese urbanites are already consuming nearly as much as they possibly can. Future economic growth must come from pushing into lower-tier markets and finding new customers in China’s interior, far from the coasts that have benefited most from the last two decades of growth. China’s leaders have sought to expand domestic consumption as part of their plan to transition from an export- and debt-dependent economy to one more reliant on the spending power of the Chinese people. But household consumption has remained about 40 percent of GDP in recent years, well below the global average of around 60 percent.
Rather than joining the ranks of new consumers as many had hoped, rural Chinese—including the several hundred million who have migrated to cities—have effectively become an underclass. Overall incomes have risen, but people with rural origins still earn less than half of what city natives pull in yearly. As industries automate and demand for labor dwindles, those from rural backgrounds struggle to reinvent themselves as service workers, gig workers, or entrepreneurs in their hometowns and villages.
Rather than joining the ranks of new consumers as many had hoped, rural Chinese have effectively become an underclass.
Restrictive practices that date back to the 1950s hamper rural dwellers. China’s system of household registration, or hukou, once ensured that the country had ample and cheap agricultural products as it industrialized. But the system still ties people’s social welfare benefits to their place of birth instead of to the place where they live. As a result, migrants are unable to get decent, affordable health care or a good education for their children in the cities where they live. Instead, they go to subpar private medical clinics and put their children in private schools that provide poor yet often expensive educational programs. The hukou also artificially depresses the wages of migrants by making it harder for them to organize or otherwise press their interests with employers. The practice once guaranteed a steady supply of cheap labor for China’s “Factory to the World” economic model, but it now prevents migrant workers from becoming middle-class consumers. Finally, the hukou requires rural Chinese to set aside large portions of their earnings to cover unexpected medical bills, tuition fees, and retirement. All that saving prevents people registered in rural areas from spending like their urban counterparts and depresses overall consumption. It also explains why China has an artificially high national savings rate of about 45 percent of GDP, more than twice the global average of around 20 percent.
Migrant children drop out of school at far higher rates than other Chinese children. Their primary education is often inadequate, and they are forced to return to the countryside for middle school and high school. Many feel alienated living alone in interior provinces and studying at huge, impersonal boarding schools. In part because of these problems, only about a quarter of China’s labor force has graduated from high school, research by the Stanford economist Scott Rozelle has shown. Many migrant children are unqualified for skilled or high-paying jobs.
An antiquated land-ownership system, also from the era of Mao Zedong, further suppresses social mobility for China’s rural poor. In contrast to urban real estate, which can be rented or sold at market rates, rural landholdings are “collectively owned.” Migrants and farmers cannot rent or sell their property for nonagricultural purposes. This difference has helped make the country that was once known for its egalitarianism one of the most unequal countries in the world. According to the economists Thomas Piketty and Gabriel Zucman, the proportion of total wealth held by the richest one percent of Chinese grew from just over 15 percent in 1995 to 30 percent in 2015. This rate of consolidation is roughly in line with that of oligarchic Russia, where the richest one percent of the population saw its share of total wealth double over the same period to 43 percent. China’s wealthiest ten percent now hold 67 percent of all wealth, a proportion that is also comparable to Russia. Making matters worse is China’s regressive tax system, which relies substantially on value-added taxes that fall most heavily on the poor, further crimping their ability to spend.
So why doesn’t China simply jettison these decades-old policies and free its hinterlands to drive productivity and growth? After all, that is exactly what the top leaders of the Chinese Communist Party (CCP) announced that they would do back in 2013. But since then, efforts to reform the hukou and land-ownership systems have been limited. Only the smaller, often economically unattractive cities have been opened for permanent settlement by migrants, and little progress has been made toward giving farmers more control over their landholdings. City officials who oversee social welfare programs, including education and health care, see the cost of integrating new families as exorbitant. Local governments in rural areas, unlike individual landholders, are allowed to sell and lease collectively owned tracts for commercial purposes. They have become highly reliant on that revenue stream, according to the University of Washington political scientist Susan Whiting, and so are loath to grant stronger property rights to rural people.
To make matters worse, officially registered city dwellers, including urban government officials, tend to view migrants as aliens and tolerate them only as long as undesirable jobs need to be filled—such as those on manufacturing lines or construction sites. Waidiren, or “outsiders,” as migrants are derisively called, are commonly blamed for all manner of urban ills, from rising crime rates to traffic jams to communicable diseases, such as COVID-19, the disease caused by the novel coronavirus. Chinese who were lucky enough to be born with urban residency have little interest in competing with migrant families for spots in already overcrowded schools and hospitals.
Municipal governments are pushing migrant workers out of many cities in China and forcing them to return to their hometowns.
Municipal governments are pushing migrant workers out of many cities in China and forcing them to return to their hometowns. In 2018, many top-tier cities began expelling migrant families from crowded apartment blocks in the name of public safety, restricting permits for migrant-run small businesses and shutting down private schools. Now, many other cities are doing the same. China’s leaders, pursuing their grand vision of rebalancing to a more consumption-driven economy, have attempted to choreograph the changes from above: rather than loosening household registration and letting migrants live and work where they wish, officials have mostly opened up small cities that they view as likely to benefit from an influx of people. Too often, these cities suffer from low growth and offer few employment opportunities. Beijing seems to think it can rejuvenate these depressed regions by simply pushing migrants toward them—as if the new residents will magically find jobs or create small businesses—and at the same time solve the problem of excess housing stock with high vacancy rates.
The hope among Chinese economic planners is that they can boost rural consumption without launching sweeping reforms of restrictive Mao-era policies. The nongmingong, so the argument goes, will earn more—and consume more—working in new service industries and in the gig economy or by becoming entrepreneurs. No longer toiling in factories or on construction sites, they will instead write mobile apps, drive for ridesharing companies, and run tour companies in their hometowns. The problem is that most rural-born Chinese don’t have the skills for these trades, and the gig economy has shed employees rapidly as the overall economy has slowed. Skilled sectors like telecoms, information technology, computers, finance, and business services still don’t make up a large share of China’s service sector, and they aren’t growing quickly, according to Hong Kong University of Science and Technology economist Albert Park. Instead, low-end service jobs known for low pay and high risk, such as motorcycle courier, have become the most common among rural and migrant Chinese.
Real reforms that would unleash the productivity of China’s hinterlands would require a significant relaxation of CCP control over cities, as well as the countryside—a concession that party leaders, intent on tightening rather than loosening their grip on power, are unlikely to embrace. Not only would rural governments lose valuable revenue streams and urban ones acquire new economic burdens, but the party would lose one of its most powerful tools of social control: the ability to dictate where half the population lives. But unless the CCP can integrate rural-born people and enable them to join the ranks of the middle class, China’s economy is unlikely to maintain the transformative level of growth that has defined the last two decades. And the shadow over China’s economy will darken prospects well beyond its borders. Even as the country shakes off some of the damage done by the coronavirus, it won’t be able to lift the global economy out of recession. It will be lucky to avoid one itself.