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China’s future discussed at Asia’s equivalent of Davos

As the only Finn at all three days of the Boao Forum, Sitra's Teppo Turkki reports on the major issues facing China and Asia in the coming decades...

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Held since 2001, The Boao Forum for Asia (BFA) has become an important regional platform for decision-makers, high-level officials, executives and researchers from various parts of the world, particularly Asia. For the Chinese government, this annual conference in Hainan functions as an arena for economic policy debate, akin to the World Economic Forum (WEF) in Davos.

This year, heads of state from 10 countries and 1,477 participants from 43 countries, mostly Mainland China, were in Hainan. At more than 400, the number of media representatives accredited for the event was very high.

The theme of the conference was Seeking sustainable and innovative restructuring – for all. According to Zhou Wenzhong, Secretary-General of the Boao Forum for Asia: “The forum provides a platform for high-level leaders from government, business and academic circles to discuss pressing global and regional issues in Asia”.

The BFA presented a new and fascinating image of the current developments, challenges and change trends in China. Hainan’s organisers had learned their lessons well from the WEF conference, applying Davos’ relatively relaxed style and approach to organising over 50 different panels and debates. The technology and services functioned well. The addresses, interaction and debates between experts were open and polemical; no themes – at least in the debates in which I participated – were avoided.

In Finland, the Boao Forum gained media visibility due to the participation of President Sauli Niinistö. It is worth noting that the president, who also made an official state visit to China, was the only European head of state to attend the Boao Forum for Asia. During the event, he also became the first European president to hold talks with the Chinese president Xi Jinping.

The haves and the have-nots

In an address widely reported across the world, IMF Managing Director Christine Lagarde forecast that economic growth across Asia would average close to six per cent, pulling the world economy behind it. She also underscored that although China has successfully lifted 500 million people out of poverty, economic inequality has increased enormously in the country.

The very rapidly increasing disparities in income distribution and the unequal distribution of economic growth among the population gave rise to discussion in many of the forum panels. Ma Jiangtang, Director of the Chinese National Bureau of Statistics, had already highlighted China’s high Gini coefficient (Gini = a measure of equality of income distribution). China officially achieved an index level of 0.474 in 2012, reflecting a remarkably high level of inequality. A higher Gini coefficient of 0.61, reported by the Chengdu University, was also referred to in the debate.

According to the Hurun Global Rich List 2013 report, China currently has 2.7 million millionaires and 251 billionaires. The number of people in China belonging to the Ten-Zero Club – people with more than USD 10 billion – is 83. The average annual income in China is USD 3,500.

From this we can conclude that while a generation ago China was still one of the most equal countries in the world, now it is one of the most unequal.

Christine Lagarde emphasised three main points in her speech. Firstly, that within the next few years, Asia should invest more in human capital than in quantitative capital growth. In the process, the development of healthcare and skills will be of key importance. Efforts should also be made to include and involve young people more effectively in society, while tapping into women’s unused labour potential is also important, as is the case in Japan.

Secondly, China should shift from material growth to non-material growth (in this respect, Chinese IPR laws and rule of law issues will play a major role). And thirdly, it should aim for more ecological sustainable growth.

Urbanisation and welfare

The issue of what is on the Chinese reform agenda characterised various debates – due either to the participating Chinese experts or the panel themes. In special broadcasts by China Central Television (CCTV), reporters pressed for an answer to the question of whether China has “the readiness, vision and courage” to achieve change. Major restructuring is necessary, with a view to continued enhancement of the standard of living and well-being of citizens. Themes such as the innovation economy, green growth, urbanisation development, food safety and the repositioning of China in global value networks were also raised in several addresses.

Another focus area concentrated on China’s need to create its own model for a welfare society. The current unbalanced economic model, relying heavily on exports, cannot be considered as sustainable or firmly grounded.

However, the most glaring problem requiring the most urgent reform concerns urbanisation. Although more than half of the Chinese population lives in cities, only 35 per cent of inhabitants have household registration or Hukou, guaranteeing official access to services providing accommodation, healthcare, social security and education for children. Some 15 per cent of Chinese city residents lead tough lives without Hukou, helping to construct Chinese cities but without access to the services provided by society. (Interesting to note: farmers earn only half the wage of an illegal migrant worker who has moved to a city – cities have huge drawing power).

There are high expectations for the intended transformation. It is therefore quite understandable that President Xi has assembled a strong team of finance experts in his inner circle, including Zhou Xiaochuan, placed in charge of the Central Bank of China, and Lou Jiwei, the new Chinese Minister of Finance.

The move to the cities

The issue of inclusive human urbanisation is of central importance to China. The Hukou reform, facilitating the social integration in cities of internal migrant workers and their children, could function as a driver of social development and welfare. Inclusion of the whole of society in urban development would bolster China’s consumer and service society, while encouraging growth in the use of new services. This should become China’s next driver of economic growth.

The chairman and president of Broad Group, an air conditioning equipment manufacturer, pointed out that 60 per cent of the world’s urban construction is now performed in China. China also uses 60 per cent of construction materials such as cement, glass and steel.

In my view, urbanisation (= modernisation) may be the most important indicator of the shape of China’s future. Urbanisation has progressed inconceivably quickly in China – in 2000, 36 per cent of the Chinese population lived in cities; by 2012 more than one half of the population, 52 per cent, did so. By 2030, almost 67 per cent of the population is expected to live in an urban environment. In other words, more than 300 million people will move to cities within the next two decades.

At the forum, it was frequently pointed out that the key problem in Chinese urbanisation lay in the inability to urban plan systematically. New cities are too isolated, with services and residents failing to meet. Workplaces, production facilities and offices are located too far from residential areas, and public transport is not developed systematically between workplaces, services and homes. For this reason, during the debate some interesting references were made to Japanese models of urban planning and development, which could serve as examples of functional urban planning for China.

In China, urbanisation should be considered a process in the development of a new economy. As such, it could support urban social development  and, consequently, quantitative economic growth. Urbanisation could be the new economic model for China. In other words, investments in infrastructure and structural aspects alone (totalling billions of US Dollars in forthcoming years) cannot serve as a model for future growth.

The goal should be an urbanisation process in which people change their lifestyles and consumer behaviour in the direction of a service- and investment-driven economy (society). Freer migration from rural areas to cities, and more-relaxed Hukou household registration rules, would generate new markets and release labour reserves for companies.

Shrinking workforce

Rapid economic growth lasting more than a decade and cheap labour have given China an annual economic growth rate of eight per cent. At the economic seminar, it was interesting to hear the comments of some Chinese experts on how rising unemployment has become a new and growing problem for China, as well as the fact that the skilled workers, competencies and trained labour do not match the jobs available. Unemployment has even emerged as a new phenomenon among the well-educated and recently graduated students.

In other words, the availability, or lack of availability, of a skilled workforce is transforming China’s industrial landscape. Researchers believe that, internally, Chinese production and markets will be increasingly steered by the issues of functional labour markets, continuously rising labour costs, availability of a skilled labour force, and rising energy prices. Such phenomena will have a greater influence on China’s development than can now be predicted.

At the moment, the working-age population accounts for 69.2 per cent of the overall Chinese population. In the early 2000s this population numbered around 900 million, but since 2011 has begun to shrink in absolute terms. During 2012, the working-age population fell by 3.5 million. This drop was faster than anticipated. And in 2013, the number of 15-29-year-olds as a share of the population has also begun to decline. It is estimated that the working-age population will contract by 29 million by 2020. Pressure is mounting to improve China’s dependency ratio. The dependency ratio has previously been at a healthy level.

In his address, Richard Boucher, Deputy Secretary General of OECD and an expert in Chinese affairs, stated bluntly that the age of industrial China is over. The value created by the new information economy is almost double that generated by traditional production methods. When China begins to shift from a ‘middle-income’ economy to the ‘high-income’ phase, it must have the capabilities and knowledge required to move upwards through the value chains of product refinement and service development. But how will China embark on building an economy based on information and expertise? How will China compete in the software economy, particularly with India?

The end of the state-owned enterprise?

American Edmund Phelps, winner of the 2006 Nobel Prize in Economic Sciences, was highly prominent on several occasions at the Boao Forum for Asia. He believes that China has not undergone genuine economic reform, even though this has been discussed continuously for several years. Phelps pressed for an answer to the question of where China is seeking new growth, at a time when the average productivity of Chinese industry and labour is only half that of Europe and the United States.

Phelps recommended that China engage in a critical assessment of high-level investment decisions and rapid new technology transfer. He also called for intensive state investment in the inner and western parts of the country, increasing those areas’ production and economic growth and with less emphasis on the traditional east coast growth centres.

According to Phelps, relaxing the Chinese economy’s heavy and traditional focus on state-owned enterprises (SOEs), supporting the private sector and providing enterprises with a genuine opportunity to develop new innovations are core issues in the changes that lie ahead. SOEs are China’s Achilles heel. Although they account for only one fifth of Chinese GDP, they play a much greater role than the private sector in the Chinese investment and financial markets. State-owned enterprises also operate within highly lucrative future sectors, such as telecommunications, oil, raw materials, energy, new technology and the weapons industry.

In their addresses, many Chinese experts seconded the criticisms made by Nobel Laureate Phelps. They also emphasised that, over the next five decades, the private sector in particular will be China’s future investor in and driver of growth.

Several Chinese and foreign experts emphasised the need for China to change or develop towards a more open market economy and to relax its tight regulation of economic structures, in order to generate new growth. Key issues include freer access to the Chinese markets for foreign investment, the opening up of the banking and financial sectors, and creating opportunities for SMEs to participate alongside SOEs in the official loan and financing market. In China, while the product markets have been fully opened, in the arena of industrial production they do not function effectively. Limits must also be placed on special state support for state-owned enterprises.

On the other hand, some experts estimated that, although external pressures for change are increasing, China is highly unlikely to begin opening up its internal investment and financing markets. Direct foreign investments in China will also probably remain controlled.

Huge energy reserves

A highly interesting debate was also held on future and current energy resources in China. Following the US example, shale gas and oil will assume an important role as energy sources within the next few decades. In 2014, China will become the world’s biggest exporter of oil and gas. One day, China will probably become the greatest purchaser of energy on the world market: 70 per cent of the energy used in China is coal-based.

According to the most recent estimates, Chinese slate gas and oil reserves are as large as, or larger than, those of the US and Canada combined. Various experts estimate that Chinese slate gas reserves account for as much as 12 times the currently confirmed gas deposits in China (estimate by U.S. Energy Information Administration, 2013).

China has extensive plans to produce almost 100 billion cubic metres of slate gas and oil using its own drilling technologies. Key bottlenecks in achieving this aim are the technology and competencies used for drilling and the massive volumes of water needed for releasing gas reserves. It is already understood that the huge volumes of water required for drilling will reduce the water supply needed for agriculture and cattle breeding in rural areas. In certain areas, this will result in a genuine and severe lack of water.

The other problem is of a technical nature. In China, slate gas reserves are located more than twice as deep underground as in the United States, i.e. at an average depth of 4,000 metres. In addition, deposits are often located in difficult-to-reach areas. Both of these factors will raise production costs.

By 2015, China is expected to draw up production and pricing rules for slate gas, after which it will be able to launch actual production. For example, in March 2013 the Royal Dutch Shell Group signed an agreement with China National Petroleum company, on the basis of which Shell will invest a billion US Dollars in prospecting for, and the drilling and exploitation of, Chinese slate gas. The goal is to produce 6-7 billion cubic metres of gas per year.

Reform of the one-child policy? 

The Boao Forum for Asia engaged in an extensive discussion of the forthcoming demographic crisis and an ageing China. Some sensational facts were also presented – if the current demographic trend continues, by the end of this century (by 2100) its population will fall to 500 million, the vast majority of whom will be over 65. Current data suggests that, in the next three decades (by 2040), China will be home to more than 400 million people above the age of 65 and more than 100 million over 80.

This poses an enormous challenge, both to the Chinese and the world as a whole. Chinese cities have seen a major fall in birth rates, which have reached record lows. Today, the birth rate does not rise above 0.88/woman, among the lowest in the world. However, in demographic terms, China will prosper for at least the next decade.

It is assumed that in order to manage its current demographic trend China will adjust and reform its one-child policy in the very near future, redefining its birth restrictions. Another issue is whether Chinese people living in cities begin having more children. The examples set by other eastern Asian regions and countries (Hong Kong, Singapore, Taiwan and South Korea) suggest that the urban birth rate will remain at a very low level.

In the forum discussions, it was thought that in managing its ageing social development China may follow the Japanese example, where the family and private individuals still bear much responsibility for the care of the aged. Major investments are/will be made in the development of preventive medical treatment and rehabilitation in particular, as well as nutritional recommendations for maintaining health and self-care.

Leaving Europe behind? 

As the only Finn participating in the entire three-day economic seminar, I could not help noticing the terms in which Europe was discussed and how the European economic crisis affected various debates. Many addresses reflected a cautious, even disappointed, posture towards Europe. Asia was clearly distancing itself from Europe. China is well aware of the problems emanating from the European economic crisis – and the excessive costs of European-style welfare societies in particular.

Elaine L. Chao, US Secretary of Labour during the George W. Bush era (born in Taiwan, and the first Cabinet minister in US history to be born in the Pacific-Asia region) stated, in almost provocative terms, how she had attended Davos WEF conferences for years, during which time their main theme had been the rise of China and India. “However, year after year fewer and fewer Chinese and Indian participants were seen in Davos,” she said. Chao stopped going to Davos and Europe, and now primarily visits East Asia.

Liqun Jin (Chairman of the Board of Directors, China Investment Corporation) underscored the point that Europe must save itself. “One of Europe’s key problems lies in its expensive welfare state structures and social security. Europe needs radical reform in the role and status of trade unions.” Liqun Jin explained how he once had had a debate in France about the competitiveness of China and Europe: “How can you compete against the Asians with your 35-hour working week, when Asians work 50-60-hour weeks?”

The addresses at the Boao Forum for Asia left an impression of Europe as a continent caught in a highly negative spiral. Living conditions and opportunities for leading a good life are deteriorating now and are set to continue doing so. The conclusions drawn were that, although the key challenges in terms of the transformation and future of China are related to building social security, healthcare, reasonable living conditions, urbanisation, food security, and pensions, China will not develop into a European-style “welfare society”. Singapore, and the social security model created there, might provide China with an example of how to build a welfare society.

Greater public debate 

Today, China is still the world’s most significant importer and exporter of industrial products. China is playing a more and more complex and important role in the world’s various production networks. However, its position as a producer, assembler and process manufacturer will not enable it to achieve the level at which it can develop significant new, value-adding services. For this, new opportunities and skills will be required.

At the Boao Forum, the status, strengthening and exchangeability of the Chinese currency (RMB) on the global financial market gave rise to much debate. Various experts noted the first state visit made by Chinese president Xi Jinping to Russia, to Tanzania and to Durban in South Africa, where the fifth BRICS Summit was held (BRICS being an association of five major emerging economies: Brazil, Russia, India, China and South Africa).

The political agreement achieved in principle between the BRICS countries, on the establishment of a new BRICS development bank and Contingency Reserve Arrangement (CRA), is of great interest. Cooperation between the BRICS countries is believed to be strengthening China’s global role and the status of the BRICS nations in relation to the IMF and the World Bank. Some experts asked whether the Chinese RMB will rival the US Dollar as a global currency? And when will this happen?

Elsewhere at the Boao Forum, an open discussion was held on how, as a society, China needs new, strong, popular and grass-roots level movements, as well as a public arena open to new ideas in which citizens should not be punished for dissent. China is changing and needs to engage in creative discussion in various forums (social media in particular) and to generate new ideas. A more diverse public debate is required, in support of regional and national decision-making.

However, in one of the panel discussions Charlene Barshefsky, who was involved on behalf of the United States in negotiations for the Chinese WTO agreement and the trade agreement between the US and China , pointed out that China will not become “a democratic society” along the lines of the western model. Today, the Chinese are saying “no” to corruption and inequality – even though, under the right circumstances, they could result in faster economic growth. According to Barshefsky, the most important social and political reform the Chinese are seeking consists of the development of a pluralistic society that tolerates difference.

On the other hand, when contemplating Chinese society, it should always be borne in mind that political leadership is strongly marked by history and the related models and cultural practices, which clearly differ from those of western models.

Final thoughts 

I would like to end with an interesting vision presented by Laurence Brahm, expert on Chinese affairs, when commentating on the debate China’s Reform Agenda, recorded by CCTV at the forum. According to Brahm, the reform goal should be the wisest possible use and exploitation of the resources (people, natural resources and energy) available to China. In other words, how can China do more with less and achieve higher overall resource efficiency?

A possible and desirable vision of new growth is the green growth model. China has already successfully reduced its energy consumption in relation to GDP. The curbing of greenhouse gas emissions has begun and state support has been provided for renewable energy production and nuclear power. It is now hoped that the Chinese government will begin to channel more financing and investment towards renewable energy solutions and green growth that generate new jobs, entrepreneurship and innovations, and which strengthen local economies and enhance the living environment of cities.

The future vision for China could be summarised by applying the concepts of SMART, GREEN and BLUE cities:

  • SMART: construction and real property. Use of sustainable energy solutions, smart building    technology, recycling and the reuse of waste. In urban planning, public transport will play a central role (Japan as an example);
  • GREEN: efficient use of resources. Recycling, local solutions for energy production,                 renewable energy solutions and new green technologies;
  • BLUE: focus on water services. The smart recycling of water, efficiency, cleaning and reuse of process waters for industrial purposes and local water solutions.

More information:

A detailed programme for the Boao Forum for Asia can be found at here.

Boao Forum for Asia website in English.

News agency Xinhua’s special Boao Forum for Asia web pages.

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