To change course touches the powers that be

Will China manage to make its economy more social and sustainable?

Some things change fast. Very fast.  Despite predictions that it wouldn’t happen before 2040, China is, according to some analyses, already the world’s largest economy. It is certainly the biggest exporter, and in East Asia, the renminbi is snapping at the dollar’s heels. However, the country’s growth exposes a lack of social and ecological sustainability.

The Chinese people’s performance over the last thirty years is impressive. The workers produce mobile phones and ties at mind-boggling speed for twelve hours per day, and surprisingly, the Chinese government manages to keep its giant machine more or less on the track. Still, beyond the appearances, Chinese leaders are aware that a change is needed to remain successful.

Back in 2007, Wen Jiabao famously voiced his concern regarding the lack of sustainability, balance and coordination in China’s economy. He explained that it is destroying the environment, that social inequality is on the rise and that the country is too dependent on export and foreign investments instead of domestic consumption. Whether China is resilient enough to change the course of its economical tanker is of vital importance for the Chinese and the rest of the world.

Not Sustainable

Despite Wen’s 2007 warning, China soon surpassed the US as the world’s largest emitter of greenhouse gases. Both countries were at the same level in 2007, but by 2010, China managed to emit 23 % more than the States – a trend which has continued ever since, due to China’s rise as the world’s production centre. The GEO5 report of the United Nation’s Environmental Programme links 10 % of China’s emissions between 2007 and 2010 directly to its exports to the USA. Still, China has been making an effort to curb this, according to Professor Qi Ye of Beijing’s Climate Policy Institute: “China has been more efficient in its energy use, which allowed it to avoid emitting 1.55 billion tonnes of CO2 over the last five years.” Nevertheless, air pollution has become a tangible issue in Beijing. 

Water problems are increasing as well. Home to a fifth of the world’s population, China has access to 7 % of its sweet water supplies. On average, this means every Chinese citizen should have 1.813 million litres of water. Though this may seem like a lot, most of this water is used in agriculture (62 %) and industry (25 %). Debra Tan of Water Change Risk states that this equates to 25 bathtubs per day, versus the US’ 125 daily 200 litre tubs. Half of the country’s agricultural and industrial production stems from the 11 dry provinces, who can count on less than 400,000 litres of water per capita – significantly below the UN’s limit of extreme water scarcity (set at an annual 500,000 litres per person). This situation is comparable to the Middle East, but China needs to feed a lot more people, all the while supporting its status as workshop of the world.

There are five provinces that consume water beyond their yearly regeneration rate (Beijing, Shanghai, Tianjin, Hebei and Jiangsu) – which means that they are using up their water reserves. The Chinese academy for geology claims that an area six times the size of Belgium is now threatened by landslides. Beijing itself has seen several landslides in the last year, forcing the local government to close down 800 wells. 

The severity of the environmental problems has become an important subject in the 12th five year plan. Its third chapter, Main Goals, only contains environmental targets:  by 2015, China has to use 15 % less energy, 30 % less water and reduce emissions by 17 % for each product unit. The plan also contains a reforestation goal, with the aim to increase the country’s forested surface from 20.36 % to 21.66 %, and states that the share of renewable energy must grow from 8.3 % to 11.4 %.

Hu Siyi, the Vice Minister of Water Resources, mentioned earlier this year that China’s water usage has already surpassed the natural regeneration capacity. Debra Tan believes that the openness of the government in this matter is proof that a turning point has been reached: “The extreme scarcity of water is not only an ecological problem, it starts to threaten social and economic stability – so the Chinese government has no choice but to react.”

Climate politics have also moved beyond environmental matters, according to Yang Zhenlin of the Climate Policy Institute: “Effective climate policies should ensure security in water, energy and food.” Yang stresses that the Chinese government wants to reach its goals mainly through enforcing regulation. “The European experience with market incentives like emission trading is not convincing. Norms and regulations are more effective.”

Does a Top-down Approach Work?

The question remains whether the government will be able to steer this enormous nation in the desired direction. “The provinces’ growth aims are not in line with the central government’s environmental goals,” declares Professor Qi Ye. In 2011, the goals concerning energy efficiency were not attained, and neither where those concerning water usage. The government has put a cap on water: in 2015, China must not use more than 635 billion m³, and in 2020 the cap is set at 670 billion m³. Still, when you add up the provincial caps on water usage, the central cap is surpassed and so one might ask how far Beijing’s arm really reaches.

Far enough, according to Toland Lam, who runs Meixin Manufacturing in Shenzhen and chairs the organisation of recycling companies in Guangdong – who import a lot of Europe’s plastic waste. “They check your water and air emissions. We have to spend a lot of money to reach the targets, and now they want the imported waste to be sorted more thoroughly before it reaches China. This is a threat to our operations: wages in Europe are too high to have this waste sorted over there. China risks losing millions of jobs and cheap manufacturing resources to Malaysia and the Philippines, who have less stringent environmental regulations. 

Belgian entrepreneur Raf Vermeire tries to sell solutions for renewable energy to medium-sized Chinese cities. “A lot of local communities and companies are not convinced yet. There has to be a clear profit before they sign on, and even then they generally expect me to join in the investments. When faced with the choice of adding a production line or investing in cleaner production, they will most often prefer the former. We haven’t reached a turning point yet, but I think we’re getting close.”

Sometimes, local party chiefs and companies ignore Beijing’s targets. Because people are not quite permitted to unify in strong environmental organisations, Chinese grassroots movements have a hard time influencing the situation. Nevertheless, the people are concerned about the environment. Ke Jian, Professor in Environmental Law at the University of Wuhan states: “Opinion surveys have shown that the environment is the fourth most important issue among the population.” Balina, a student of biology and an avid bird watcher, explains what the role of environmental organisations could be: “A large part of the population does not know a lot about climate change. We need to inform people about these issues.” This role becomes even more important in the light of the government’s limited transparency.

When meeting up in Wuhan with Liu Wenji, Director of the local administration for environmental protection, it takes a while before he admits that the air quality in the 8 million-strong city doesn’t conform to the Chinese norms. Liu stresses the authorities regularly publish data. Professor Ke confirms this but there is a big caveat: “The authorities indeed have a tradition of publishing environmental data, though this happens very selectively.” 

The right amount of transparency is subject to a high-level debate, as exemplified by the new environmental law which is being prepared by the National People’s Congress. Professor Cai Shouqiu, chairman of the Chinese association for environmental legislation summarizes: “The draft obliges that environmental information has to be published by the relevant authorities. This implies that NGOs are breaching the law when they inform the public about ecological issues.” Cai and Ke don’t think this is a good idea because they believe that public participation could be very important in environmental policies. As Cai puts it: “That’s why it is regrettable that the draft does not include a possibility for NGOs to file a complaint to defend the common good. Another issue is that the proposed law states that the government has to set its targets according to the Chinese situation. We believe these targets should instead be set based on public health.” Cai and a couple of colleagues have contacted the President of the National People’s Congress to discuss these matters. The press, meanwhile, remains largely ignorant about the issue. “That’s the Chinese way of doing things,” Ke says with an enigmatic smile


Changing the model, therefore, in one way or another, touches the powers that be.
October the first, it’s the Mid-Autumn Festival and the start of a holiday week introduced five years ago by the government – increasing free time for tourism and consumerism. The streets and squares clearly illustrate this, with over 85 million reported travellers. The television reports enormous traffic jams between Shanghai and Hangzhou: millions of people travelling with gifts. On this day, China almost looks like a wealthy country. Still, 400 million of its inhabitants earn less than 2 dollars per day, as Liu Kaiming, whose Shengzhen-based NGO promotes worker’s rights, points out. “On the other hand, there are people like me, who started working for 10 dollars per month, but nowadays can travel the world and get paid quite well. The gap is getting bigger every day.”

When former prime minister Wen Jiabao called the Chinese economy unstable, he was referring to the tensions caused by growing income inequality. The sensitivity of the issue is shown by the recent blocking of the Bloomberg and New York Times websites, after information on the enormous wealth of Wen (2.7 billion dollar) and the new party leader Xi Jinping (one billion dollar) was published.

But the government isn’t just covering things up, it has tried to solve the problem by increasing social security and the minimum wage, and through a new labour law. According to Economics Professor Ming Lu from the University of Zhejiang, wages have risen by 10-15 % per year over the past three years, even though inflation was between 3 and 5 % – meaning that purchasing power is on the rise.

Liu Kaiming, who often helps foreign companies by encouraging the communication with their employees, knows that workers still demand a better situation: “Last year, there were over a million work-related complaints, and there are strikes every day. The new generation of workers is no longer satisfied with the low wages, and for some factories it is getting increasingly difficult to keep their staff. In electronics, the yearly turnover of staff is 200 %! ” That means that staff stays on average for six months in a company.

Increasing wages do not, however, mean that the Chinese can save more these days. Pun Ngai is a researcher at the Polytechnic University of Hong Kong and has been analysing the labour situation in the Pearl River delta for the past decade. She found that, even though people earn more, they also spend more. This is also what a young man tells me. He started as a barkeeper in Guangdong, on a salary of 1500 yuan per month (a euro is roughly 8 yuan). Four years later, he’s earning 5000 yuan (625 euros) per month. “I don’t save anything though, because my lifestyle has changed. I still don’t have a steady job, nor a wife – and I guess that even if I would want those, I’d change my mind after a while.” Philosophically, he adds: “Everything changes so fast, it’s hard to find out what you really want.”

Employer Lam has another take on the issue of rising wages: “Right now, the minimum wage in Shenzhen is 1300 yuan (162.5 euros), but once you include extra hours, social security, food and lodging, an employee will cost you around 3000 yuan per month (375 euros). In the past, employees would have worked 24 hours per day for a wage of 500 yuan, but the current generation is different: since they can find another job easily, they are less loyal. I have to negotiate about weekend work, and even when I do pay more for that, some of them still prefer spending their time with their girlfriend. They want to enjoy life, which you could of course see as a positive evolution. But the fun wears off once ten thousand of them are shouting demands through your office door. I seriously doubt that labour-intensive sectors can stay in China.” His opinion is reflected by a Chinese-born fashion designer working in London: “We have to source our production elsewhere, China is too expensive.” 

Pun Ngai notes that the new labour law has changed the situation significantly: “There are more written contracts, overtime is being paid more and social security has become a necessary condition to attract new employees. It’s vital that employees are much more aware of their rights, but without coordination, that increased awareness gives rise to chaos and strikes. To organise themselves, they’ll have to stick with the same employer for a longer time. I think we’ll see quite a lot of strikes and disorder in the coming years.”

Liu Kaiming blames the political system: “The government does just enough to stay in power – even though it has the money and technology needed to offer people easy access to education and healthcare. In short, it could take care of its people. The lack of freedom probably limits the reach of the voice of the people: there’s no organisation, merely individuals.”

Too Dependent on Export

Despite the growing salaries, domestic consumption makes up only 37 % of China’s economy – in the United States, that share is 70 %. The reason for this is that investments have risen a lot faster than wages. The Chinese government has tackled the 2008 crisis by using the state banks to offer massive credit to local government and state-owned companies.

By now, investments make up half of the GDP (in most developed countries, this is 20 %). While this has helped to create a lot of new jobs, it is expected that a lot of these loans will not be paid back, because many of these investments will prove not to be profitable. On top of that, production capacity has yet again been increased through this policy. Domestic consumption won’t take up the created surplus, making China even further dependent on its exports. “These mass investments hamper the growth of the share of labour and consumption in the economy,” states Professor Ming Lu of Zhejiang University. Since exports to Europe and the US have been slacking, the question remains whether the government will launch another investment round, or accept that growth will be lower than expected. As of now, the latter seems to be happening: a growth rate of 7.5 % has now been deemed acceptable.

To reduce the economy’s dependency on exports, Lu argues that the hukou system has to end. This household registration system keeps farmers that have started working in the city factories – the nongmingong – tied to their village of origin; only there they have rights to education and healthcare. “Our research shows that migrant workers consume less than the urban population because their social security is lower in the city: they don’t know what will happen if they get ill, or whether their retirement contributions will maintain their value when they go back to their village. They’re also aware that they won’t be working in the city forever, which means their income will inevitably decrease, which is why they try to save as much as they can.” Meanwhile, the urban population remains hostile towards the nongmingong: “The city people fear that they will receive less once the migrants start benefiting from social security as well. China has to become more united.”

Another crucial tool for reorientation of the Chinese economy is interest rates. These are kept low by the government (due to the capital controls the government can easily set the interest rates), to offer through the state banks cheap capital to, chiefly, the state companies – which make up 80 % of the Chinese stock market. The low interest rate functions as a subsidy, a financial transfer from households to companies, from consumption to investment. If you want to change the tanker’s course, the interests will have to go up, but liberalising interests is too hot an iron for most politicians. Many of them are involved in state companies, whose profits depend partly on the low interests.

A man who for decades used to work for one of the state banks testifies: “Of course the state banks love to give credit to state companies, they offer them an interest rate of 5 %, versus 10 % to everyone else. It’s a tradition that’s part of the system, but there’s a reasoning behind it as well: lending to a state company is very safe. If the company does not make a profit, the state can always intervene.”

Professor Lu explains why the interest rate is such a sensitive topic: “Many state companies and local governments lend a lot of money. When the interest rate rises, they get in trouble and can expect a serious decline of their profits.” The problem is tied up in politics in another way as well: the state companies are often used to offer valued hundreds of thousands of party members a well-paid job. Changing the model, therefore, in one way or another, touches the powers that be.

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