In the book, you say China is at a ‘critical turning point’ – investment-led growth has led to bad debt and Non-Performing Loans. Can China get out this debt trap?

Following the 2008 global financial crisis, China launched a massive stimulus programme to keep its economy afloat. It worked, in that China avoided the dramatic falls in economic growth that many other parts of the world saw. But that reliance on debt to drive the economy then became a bad habit that the government has yet to overcome. Total debt as a proportion of GDP is now more than 300 percent and has been growing steadily. This kind of growth at this level is seen by many economists as unsustainable. China’s leaders know what they need to do: in order to break their reliance on debt-fuelled growth – which by the way has contributed to the country’s pollution problem and has been energy wasteful – they need to build up a much stronger consumer and service-driven economy. But while progress has been made, they are still struggling to grow the proportion of the economy made up of domestic consumption; it is still below 40 percent, a rate not much changed in years, and one that is some twenty percentage points below the world average.

How scary are the demographics? Has China run out of its once seemingly limitless supply of young workers?

What had been what economists call a “demographic dividend” has now become something of a demographic time-bomb for China. And recent moves towards ending the notorious one-child policy appear to be too late; couples have reached an income and education level where they are no longer interested in having more children. The high costs of education in China also discourage families from having more kids. As the workforce ages (and it recently began to shrink in overall size too), innovation tends to suffer; those who are older typically are not as willing to take risks with new ideas and that hurts the economy’s vibrancy, research by Ctrip founder James Liang has shown. In the factories, demographics, of course, has had a huge impact as workers age, shortages emerge, and wages rise. Overall competitiveness has suffered, with manufacturing wages now higher than in Mexico or Malaysia. Meanwhile, the cost of supporting an ageing population with ever more retirees is substantial. It is putting pressures on the finances of local governments and families alike, who have to pay for new health care and pension costs.

The economic ‘rebalancing’ away from FDI and manufacture to retail and services has really been all about the urban middle class. How is rebalancing playing out in the countryside?

In my mind, this is the biggest challenge facing China: ensuring that the other half of the country who still live in rural China or are migrants who hail from the interior regions, also become part of the spending middle class. This is a top government priority and is critical to the success or failure of the China model going forward; it will not be easy and may well fail. One of the biggest obstacles is the continuing strength of the hukou policy. That means that migrants are unable in most cases to access affordable healthcare in the cities they live in or put their children in urban public schools. Instead, they are supposed to return to the countryside for their medical needs, put their children in low quality but often pricey private schools that cater to migrants, or leave their offspring as ‘left-behind children’ in the interior. The policy also explains the prevalence in China of what economists call ‘precautionary savings’ – when people are afraid to spend too much today and instead are saving most of their earnings to pay future costs of education, healthcare or retirement. That too helps explain why China has a savings rate of around 45 percent, much higher than in most places around the world.

You say the government now favours ‘reverse migration’, back from the city to the country, as a way to help care for the rising rural elderly population, and revitalise local economies with small businesses. Is this happening and does it work?

The record of this policy is mixed. Policymakers do see the trend of migrants returning to their hometowns as positive, in that they can both be closer to their ageing parents, and help overcome the national tragedy of left-behind children or youth growing up in the countryside far from their mothers and fathers. Local governments in the interior have tried to ease the challenges faced by returnee migrants by providing training and financial help, often in the form of low-interest loans, for those who want to start their own businesses. The goal is that migrants will succeed as entrepreneurs upon their return and help to revitalise places that otherwise might lag as China develops. One challenge is that the returnees may feel like strangers in their own villages, after decades working in faraway cities, and thus may not have the right connections or knowledge to succeed. There are many cases already of returnees seeing their newly-formed small businesses fail.

It has been suggested that the problem of a lack of workers can be solved by automation and AI. Is this possible, and if so, you seem to suggest that it means employers are now looking to that future and ignoring better pay and conditions for human workers?

Even before the trade war and Covid-19 brought the issue of global diversification of supply chains to a head, factories producing lower-value products were leaving China in droves for countries in SE Asia and beyond. Now that trend has only accelerated. It is something that has long worried policymakers who do not want China to face the same hollowing out of industry that was seen in places like Japan. One plank of the national strategic upgrading plan “Made in China 2025” is focused on encouraging the automation of factories, along with building up a more competitive domestic robot-making industry, with both factories and automation companies being granted large subsidies in cities like Dongguan. This is helping China move more quickly towards a less labour-intensive manufacturing future. But it is also causing frictions between factory management and those migrant workers who do not want to return to their villages but would rather stay in the cities. In some cases, worker protests have erupted as factory managers have moved to quickly automate and shed employees.

Are there any good business success models for rural returnees?

In rural Guizhou, local governments are trying to encourage returnees to set up small businesses in ecotourism, with the aim of luring wealthier urbanites to holiday in this part of the country. In many ways, that is a natural choice, given the stunning mountain scenery, interesting ethnic diversity found among the people living there, and the spicy local cuisine, not to mention the clean environment with little industry in most of the province. Other places including neighbouring Yunnan have tried to use e-commerce to find markets for local delicacies, whether it’s Pu’er tea or wild mushrooms. Both of these models have been successful to a degree, although not without facing challenges. One common problem has been the phenomenon where everyone jumps into the same business and creates a glut, where for example, hundreds of rural villages all might be competing for the same tourists. Provincial governments too have often focused on large capital-heavy, but low labour-intensity vanity projects, like Guizhou’s push to make its capital of Guiyang into a national Big Data centre; the trouble is it provides little employment for the large numbers of migrants now returning.

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During the 21^st century, measures to reduce poverty whilst improving healthcare, pensions and social services (including education and housing) have all moved up the policy agenda of the Chinese state. The Chinese Communist Party has shifted its goals from economic growth to ‘economic and social development’ – no longer are they focussed just on raising incomes, but now want to also provide services and safety nets.

The Party’s shift appears to be aimed at enhancing its legitimacy by realising ‘a moderately prosperous society’, and at reducing the protest and dissatisfaction that might threaten ‘social stability’. As China’s economic growth rates slow, attention has turned to quality of life along with concerns about the problems China will face as its society ages. There is also a commitment to China’s national development and a view that improving China’s economic and social health enhances its global status and influence.

The evolution of social policy since the 1990s

During the 1990s the Chinese party-state focussed on economic growth and state enterprise reform and, as part of this, reformed health insurance and pensions for urban workers – primarily the state sector. It also introduced means-tested income support and programmes for laid-off state enterprise workers to prevent urban protest (a particular concern in the years following the Tiananmen demonstrations of 1989).

But following the Asian Financial Crisis of 1997 and China’s entry into the World Trade Organisation in 2001, the focus began to turn to rural areas and the non-working urban population – now seen as a source of untapped domestic consumption and demand. The party-state introduced rural income support and pensions as well as cooperative medical schemes to help rural residents with their healthcare costs. It also introduced basic health insurance for the urban non-working population, made a commitment to a minimum of nine years of free education for all children, and announced major health care reforms.

Impressive achievements

China has seen huge reductions in extreme poverty, introduced universal entitlements to health insurance and pensions, and ensured steadily rising social services expenditure. Now categorised as an ‘upper middle income’ country by the World Bank, only 1.4 percent of the population lives on the international poverty line of $1.90 per day (2011 Purchasing Power Parity), a fall from 67 percent of the population in 1990. By 2010, China had extended health insurance and pensions across the entire population – for the first time establishing entitlements for rural residents. According to the OECD, public social spending in China has risen from 6 percent of GDP in 2007 to 9 percent in 2012. China’s government spending on health, education and social safety nets also increased in both real terms and as a share of total government spending over the decade to 2017.

Only 1.4 percent of the population live on the international poverty line, a fall from 67 percent of the population in 1990

Substantial problems remain

Despite the progress, China’s social problems are still enormous and social services remain problem-ridden. According to the latest World Bank data, from 2015, on the upper middle-income poverty line of $5.50 per day, 31.5 percent of the population remains in poverty – 430 million people. The quality of health care, education and housing varies enormously both within and between rural and urban areas – largely the result of fiscal decentralisation and policies that benefit the middle classes.

The quality of health care, education and housing varies enormously both within and between rural and urban areas

Public spending on health insurance and pensions, meanwhile, remains highly regressive, meaning that the most generous insurance schemes provide for the well off, and the least generous for the poorest in society. For example, from 1999 to 2006, although the number of people participating in publicly financed health insurance (mainly for employees in government and public institutions) was falling, this scheme still accounted for about 40 percent of the total government health budget. Meanwhile, overall public social spending remains considerably lower than the OECD average of 22 percent of GDP.

China has also set the goal of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy by 2030

Ever more ambitious goals

Under Xi Jinping, the Party has continued to set ambitious goals. It aims to eli­­­minate absolute poverty by 2020 (using the national poverty line of 2,300 RMB per annum, or about a dollar a day). It has also set the goal – by 2030 – of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy. It is pressing forward with primary care reforms in health and is introducing IT in education and has recommitted itself to increasing the quantity of affordable housing – something that has been promised for over a decade but not yet delivered on. It has also begun to tackle the very difficult problem of merging locally administered health insurance and pension schemes to reduce the divisions between urban and rural and increase mobility.

Achieving these ambitious goals and pushing through next-stage reforms will not be easy. The Party is mobilising both public and private sector firms as well as local governments to eliminate absolute poverty, and this goal looks achievable. But other initiatives will require substantial public investment and effort if vested interests are to be overcome. This is particularly evident in the health and real estate sectors, where local governments’ revenues tie them to such interests, making reform particularly difficult. Since Xi Jinping’s supporters argue that he has amassed power precisely so that he can tackle vested interests, social services may be an important test of the leadership’s commitment and ability to use their new powers for the public good.

Professor Jane Duckett is Edward Caird Chair of Politics at the University of Glasgow and Director of the Scottish Centre for China Research. Follow her on Twitter: @j_duckett.

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