Will China Fall into the “Middle Income Trap”?

Abstract

As the 2008 financial crisis unfurled with its impact on global trade and economy, China also saw a transition. The country’s high (even super high) speed growth, which peaked at 14.2% in 2007, slackened to medium-to-high growth, thus entering the new normal era of economic development. In response, international organizations such as the International Monetary Fund and the World Bank began to adjust downward projections of Chinese economic growth. In some international media, the prevailing sentiment toward China’s economic development was one of pessimism.

As the 2008 financial crisis unfurled with its impact on global trade and economy, China also saw a transition. The country’s high (even super high) speed growth, which peaked at 14.2% in 2007, slackened to medium-to-high growth, thus entering the new normal era of economic development. In response, international organizations such as the International Monetary Fund and the World Bank began to adjust downward projections of Chinese economic growth. In some international media, the prevailing sentiment toward China’s economic development was one of pessimism.

Prize-winning economist Paul Krugman wrote in his New York Times column in 2013 that China “is about to hit its Great Wall, and the only question now is just how bad the crash will be”, which could be read as a theory of China’s economic collapse. A Washington Post piece dated March 19, 2014, titled “China’s Next Challenge”, opined that China has already fallen into the “middle income trap” and this was “a significant event full of domestic and international implications”.¹ Half a year later on August 30, Reuters cited a U.S. think tank study that claimed China has slipped into the “middle income trap”. The study’s author, Harry Wu, senior advisor at the Conference Board China Center for Economics and Business, concluded: the over-building, over-capacity and the “advance” of the less efficient state into private sector markets have increasingly burdened China’s growth. The study found that following the financial crisis, China’s actual total factor productivity growth turned negative, dropping from an average of 3.3% in 2001–2007 to −0.9% in 2007–2012. This marked the first time that total factor productivity has weighed down growth since 1971–1977.² This study was considered a primary source of evidence that China had indeed been edging toward the “middle income trap”.

It is fair to say, “middle income trap” has become the keyword for the media and both domestic and international economists when analyzing China’s economic prospects. Nevertheless, how does China view the “middle income trap”? Will China, in fact, fall into the “middle income trap”?

3.1 Development Challenges During the Middle-Income Stage

Development challenges could arise for any country, at any developmental stage; so do opportunities. Long-term sustainable and stable development depends on seizing these opportunities whilst successfully handling the various problems that emerge during the development process. This is done by clearing the development obstacles as well as controlling risks. If the opportunities are missed and problems are allowed to exacerbate, development inevitably stalls. Generally, it appears that the leap for a country from middle income to high income marks a unique phase of economic development, with far more complexities than the move from low income to middle income.

In this development phase, opportunities still abound in part due to the notable gap that exists with developed countries. However, the former engines of development may well weaken, which would render ineffective the initial strategies of development that were adopted. This, coupled with the rise of new challenges, both internal and external, could make the development path ever more difficult to tread, even if it is paved with pitfalls. The “middle income trap” is not the result of one factor alone but rather multiple complicating elements at work together. Many countries have indeed fallen into this “middle income trap”, and the reason is that they were unable to effectively counter the arising challenges along the development path.

As China pushes ahead with its economic development and urbanization process, the country’s socio-economic structure will shift accordingly to a great degree. This entails changes to public consumption in terms of its level, structure, perception and pattern; diversification of the social fabric; increase in public interest and participation in social agenda such as environmental protection and social progress; complication of governance; and the impact of external environments on China would be more direct and diversified. In a sense, discussions of the “middle income trap” serve as a warning bell to China, as it highlights the urgency for the country to proactively adjust its development model and scientifically deal with challenges. It is also a reminder that development must build upon sustainability, social harmony and a steady march toward democracy. Specifically, China faces the challenges below in its current development phase, and it is precisely these challenges that have given rise to the speculation of China slipping into the “middle income trap”.

3.1.1 The Challenge in the Transformation of the Economic Growth Model

After the 2008 global financial crisis, the Chinese economy switched into a new phase and faced two principal development challenges. The first: economic growth has slackened from high growth to medium-to-high growth, perhaps will even abate to medium speed growth. During the 12th Five-Year Plan, China’s GDP growth rate slowed from 9.5% in 2011 to 6.7% in 2016. In particular, economic growth in 2015 dipped below 7% for the first time since 1991. The slide in economic growth gained world’s attention.

The second challenge: China’s structural transformation has reached a phase that is both critical yet painful; the structural imbalances are glaring, further aggravating the pressure on growth. Since entering the 12th Five-Year Plan period, the structural imbalances have been particularly evident in the housing market with its excess inventory, and over-capacity in heavy industries like coal and steel. Equally, soaring leverage and growing costs of doing business in China are also fettering economic growth. We could say that the moderated growth is a consequence of structural transformations. Thus sustainable growth hinges on whether China can, in fact, transform its model of economic growth.

China’s moderated growth since 2008 is in part due to the external impact of the financial crisis, and also the internal effects of economic restructuring. However, considering that in the 40 years after the Chinese economy took flight in 1978, GDP growth has maintained an annual average of 9.8%, the growth speed in itself is not the principal contradiction of economic development. Looking at the model of economic growth, we can see that the Chinese economy has long displayed the characteristics of investment-driven growth, but this model is clearly no longer sufficient to prop up high growth. Let us examine the correlation between economic growth and rate of investment from 1980–2015. Prior to 2007, the two largely moved in tandem, but after 2007, despite increasing investment sustained around 45% in the 12th Five-Year Plan period, growth took a downturn (see Fig. 3.1). This indicates that the efficiency of the investment-driven model has waned markedly since 2008.

Fig. 3.1

Chinese economic growth and investment rates (1980–2015). Note: Growth Rate is the three-year compound annual growth rate; Investment Rate is the three-year geometric mean. (Source: China Statistical Abstract 2016)

We turn to the Incremental Capital-Output Ratio trend (see Fig. 3.2): it has been on an upward trajectory from 2007, indicating even more investment is required to support GDP growth. What this implies is the falling productivity of capital, thus influencing returns on investment. Lower investment returns in turn hampers investment growth, potentially dragging down economic growth. Therefore, transforming China’s economic growth model and gradually establishing new drivers of growth would help to improve investment returns and the quality of economic growth.

Fig. 3.2

The dynamic changes in Incremental Capital-Output Ratio (1980–2015). Note: Incremental Capital-Output Ratio (ICOR) = annual incremental investment (I)/annual GDP increase (ΔY). This gives the ratio of annual investment to annual incremental output. For computation purposes, three-year annual compound growth rates and three-year geometric mean of investment rates are used. (Compiled by the authors)

3.1.2 The Environmental Resource Challenge

In the long run, resources and the environment will present the biggest hindrance to China’s economic growth. Soil erosion, land pollution and degradation, dwindling arable land, desertification, grassland degeneration, decline of biodiversity, pollution of water systems (rivers, oceans and groundwater), frequent natural disasters, poor city air quality, industrial waste discharge and household waste disposal management—to name but a few—are the current and future obstacles to quality economic development. The quandary lies in reconciling China’s ecological environment with the long-time goal of “accelerated growth”, and it forms one important feature of Chinese industrialization model, i.e., over-reliance on heavy industry, over reliance on exports, and over-reliance on investment. 

The 2015 Report on the State of the Environment in China did not paint a positive picture of China’s ecological environment overall, as tough challenges lie ahead (see Table 3.1). If these problems are not addressed in time, they will exacerbate demands on environmental governance in the future and could potentially be a source of social conflict. Overall, the ecological environment quandary has already become the biggest threat to China’s sustainable development.

Table 3.1 Status quo and challenges of ecological environment in China

What is worth noting, though, is that the environment is by and large no longer deteriorating; the environmental deficit, in a manner of speaking, is easing. The 2015 Report shows that remedial environmental projects have all achieved some degree of results; certain indicators even posted notable improvements. This is the result of China’s unceasing efforts to strengthen environmental governance. The government has made continuous organizational restructuring to this end. To cite an example: in 1988, the Environmental Protection Agency was established, being extracted from under the auspices of the Ministry of Construction; in 1998, the agency was elevated to Ministry of Environmental Protection; eventually in 2008, it became an organ under the State Council, thus affording it higher authority and independence to carry out environmental protection work.

3.1.3 Challenge of an Aging Population

An aging population denotes a shift in the country’s demographic structure toward older ages and is the result of a declining birth rate and increasing life expectancy that accompany economic development. It is internationally recognized that a population is deemed aging, if the 60-plus group accounts for 10% of the total population, or if the 65-plus group makes up 7%. By this standard, China had already become an aging population in 2000. The United Nations projected in its 2015 revised report, that China’s population will age even faster after 2015—by 2025, the 65-plus group will make up 20.4% of the population, an increase of 7.3 percentage points compared with 2015; and by 2035, that number will rise to 32.7%, increasing 12.3 percentage points from 2025. When compared with Japan, China’s dependency ratio in 2015 was equivalent to Japan’s in 1980, in 2020 it will be equivalent to Japan’s in 1995, while in 2050 it will match Japan’s between 2015 and 2020 (see Fig. 3.3).

Fig. 3.3

The old-age dependency ratios in China and Japan (1950–2050). Note: Old-age dependency ratio = number of people aged 65 and over/number of people aged 15–64. There is a slight discrepancy in the data on the Chinese population with that of the Chinese National Bureau of Statistics. (Source: Population Division, Department of Economic and Social Affairs, United Nations, World Population Prospects, the 2015 Revision)

Typically, an aging population curtails the growth of labor supply, leading to a rise in labor costs and weakening the competitiveness of a country’s labor-intensive manufacturing, thus affecting economic growth. The reality in China is, since 2003, coastal areas have experienced difficulties in the labor market—labor costs were clearly on the increase. This has given rise to the viewpoint that China’s economic growth will irreversibly decline as population aging speeds up. Japan is an important reference for those who adopt this view. Figure 3.4 is the United Nation’s collation of China and Japan’s total dependency ratio in 1950–2050. We can see that in the 1970s, Japan’s dependency ratio began on an upward trajectory, increasing from 45.25% to 48.38%. At the same time, the urbanization rate rose from 72% to 76%, increasing 4 percentage points. In the 1980s, the dependency ratio slipped from 48.38% to 43.40%, lower even than in 1970, while urbanization increased just 1 percentage point from 76% to 77%.³ However, Japan’s GDP growth in the two decades of 1970–1980 and 1980–1990 remained largely the same, at 4.46% and 4.64%, respectively. Additionally, in 1990–2000, Japan’s dependency ratio rose from 43.6% to 46.6%, similar to the levels in the 1970s, while economic growth was only 1.13%. Judging by the correlation between growth and dependency ratio, it appears that Japan’s economic growth decline cannot be attributed to population alone (Table 3.2). For example, Japan’s economic growth fallen into a low growth rate in 1990s, when the dependence ratio only experenced a slight increase. 

Fig. 3.4

The total dependency ratios in China and Japan (1950–2050). Note: Total dependency ratio = (number of people aged 0–14 + number of people aged 65 and over)/number of people aged 15–64. There is a slight discrepancy in the data on the Chinese population with that of the Chinese National Bureau of Statistics. (Source: Population Division, Department of Economic and Social Affairs, United Nations, World Population Prospects, the 2015 Revision)

Table 3.2 Japan’s population, urbanization and economic growth (1960–2010) (Unit: %)

By this same reasoning, it is unnecessary to adopt an overly pessimistic outlook of an aging population’s impact on China’s economic growth. The aging population trend is just one feature of the population in China; the economy can draw benefits from others. For starters, Japan’s urbanization rate reached 70% in the 1970s, which was a mature phase of urbanization development, while China’s urbanization rate in 2015 was 56.1%, equivalent to Japan’s levels in 1955. China still has room for urbanization, and these improvements in the future would be a key factor in propping up economic growth in the next 20 years. In particular, as the household registration system continues to reform, facilitating the movement of rural residents to towns and cities, the problems of labor shortage presented by an aging population will be alleviated.

Secondly, China’s education development, specifically in higher education, will provide the human capital that supports economic growth. Bearing this in mind, despite the diminishing demographic dividend, the “education dividend” so to speak, will be conducive to labor productivity. Thirdly, even though there is no mistaking the trend displayed in the population, the working population will not substantially drop, as the decline of labor participation rate will be gradual. For example, the percentage of people aged 65 and over increased from 8.9% in 2010 to 10.5% in 2015, but even so, the labor participation rate only slipped from 56.8% to 56.3% in the same period. We estimate that as China implements its policy of late retirement and as more retirees opt to take up informal employment, the impact of an aging population on growth will be somewhat mitigated. Fourthly, China is already adjusting its family planning policy, and this will to some extent offset the pressure of an aging population post-2030. Finally, an aging population can in fact, be a booster to China’s consumption-drive growth model.

3.1.4 The Income Gap Challenge

In the early days of China’s reform and opening-up, the country’s Gini coefficient was 0.28 and the distribution of income was near equal. However, as the market economy flourished, the Gini coefficient climbed to 0.4 in around 2000, indicating relative inequality in wealth, and then peaked in 2008 at 0.491. After 2008, the index began to slide, but China’s income disparity remains relatively large (see Fig. 3.5). There is a pronounced discrepancy in development among regions as well as between urban and rural areas in China and these differences are a major reason for the overall income disparity. It is worth pointing out that the regional disparity has been noticeably narrowing since 2004. For urban and rural residents, the income gap spiked at 3.33-fold in 2009, but narrowed slightly to 2.95-fold in 2015. However, within cities and the countryside, inequality is immense. For example, in 2015, the disposable income of the top 20% of urban earners was 5.32 times that of the bottom 20% of urban earners, a small drop from the peak in 2008 of 5.77 times. Meanwhile, the disposable income of the top 20% of rural earners was 8.43 times that of the bottom 20% of rural earners, which was an increase from before. This goes to show that narrowing the income gap presents a formidable challenge.

Fig. 3.5

China’s Gini coefficient over time (1980–2015). Note: According to UN standards, a Gini coefficient lower than 0.2 expresses absolute equality; a range of 0.2–0.3 is relative equality; 0.3–0.4 is a relatively reasonable income gap; 0.4–0.5 is a relatively large income gap; and over 0.5 is considered dangerous. (Source: World Bank, China’s National Bureau of Statistics)

The income gap problem is a matter in the public eye. The Society of China Analysis and Forecast blue book cites a 2015 nationwide general social survey asking people to rank 15 significant social matters. In that, income disparity and the poor-rich divide were the third most-voted-for problem, whereas most people see “serious or very serious conflict existing between the rich and poor”. This result shows that despite the narrowing wealth gap in China, the situation does not yet allow for optimism.

An excessively large income gap would have multiple impacts on socio-economic development. First, it hinders the consumption power of the low-income group, thus the full potential of consumption-driven economic growth cannot be realized, leaving growth dependent on investment and trade. We have seen how dependency on investment and trade cannot guarantee sustainable growth. By effectively increasing incomes and harnessing the consumption power of the low-income group, China can move further toward a consumption-driven economic growth.

Secondly, a wide income gap threatens social cohesion. The rich-poor divide has various ramifications on social stability and development. Hu Lianhe and Hu Angang (2007) concluded that a wealth gap affects social advancement in four ways. The first is the spread of discontent, which is a hotbed for breeding social instability. Second, it is detrimental to social order; it could induce criminal behavior and threaten people and property, endangering public security. Third, it upsets the social balance and could cause imbalanced or even skewed development, trigger class conflicts, and thereby inciting social conflicts and confrontations. Fourth, it discredits a governing system’s justice and authority, weakens a country’s cohesiveness, and at its worst, is a menace to a nation’s security and unity.⁴

Objectively speaking, the income gap arose from an uneven development of the market economy in urban and rural areas as well as across different regions in China. It is also a consequence of unequal opportunities in an imperfect system. Narrowing this gap is a task that takes time. Despite all this, we are able to see a trend of improvement, and as China persists in refining its social welfare system, we are bound to see some remedy of the inequality.

3.1.5 The Social Stability Challenge

Economic development and population shifts present challenges to social stability. At a forum on social governance and innovation for ministerial and provincial officials on February 19, 2011, General Secretary Hu Jintao said China is in a critical development phase where both strategic opportunities and social conflicts abound. Thus, if stability cannot be ensured, important development opportunities will slip by. Now, China is presented with a strategic opportunity to leap over the “middle income trap”. The experiences of other countries show that social stability is essential to the middle-income development stage. This is because in this stage, economic development and social development are more intertwined than ever, with one relying on the other. If social stability is at risk, more expenditure must be redirected to guarantee it, thereby leading to the crowding-out effect.

China is currently in the middle-income phase, and its social stability could see impact from the following aspects. First, there is large-scale social mobility. Prominent development gaps exist among regions and between urban and rural areas—a major incentive for migration. Since 2000, the country’s transient population has been continuously expanding, from 121 million people in 2000 to a peak of 253 million in 2014. The number declined slightly to 245 million people in 2016,⁵ which accounted for 17.7% of the total population. Generally, society’s vulnerable groups make up some of this transient population—they are prone to the volatility of employment and physical ailments, which also make them a threat to social stability.

Second, the transition toward a steady social structure is complicated. China’s social structure is in constant flux as the economy develops, urbanization expands, education advances and income distribution evolves. Professor Li Qiang of Tsinghua University referred to the International Socio-Economic Index of Occupational Status (ISEI) collated in the fifth and sixth census, to show China’s overall social structure is shifting from the “inverted T” to the Chinese character “土”—akin to a pyramid structure. This indicates that China’s social structure is still evolving, and will be a feature of development in the long run, until it reaches the stable “olive” shape.

An important feature of an olive-shaped social structure is the expansion of the middle-income group, which was pointed out in the 2013 Guidelines on Deepening the Reform of Income Distribution System. At the 13th meeting of the Central Leading Group on Financial and Economic Affairs on May 16, 2016, General Secretary Xi Jinping emphasized that enlarging the middle-income group is instrumental to realizing the goal of building a moderately prosperous society, attaining structural reforms, maintaining social peace, harmony and stability, and is necessary for the country’s lasting wellbeing. Vital to the transition toward an olive-shaped social structure is a high quality, inclusive new type of urbanization, which will generate economic opportunities for all—an inclusive growth will prevent class solidification and allow for a virtuous circle of efficiency and justice.

Overall, Chinese society has been stable since the reform and opening-up, but threats to that stability have always existed, and incidents have erupted involving certain groups. Since 2000, the number of public security and criminal cases has notably increased (see Fig. 3.6), with the number of filed criminal cases rising steadily. Although there had been a downturn in the number of public security cases from 2010–2014, the number was still higher than that of 2000–2005. This suggests that we should view the stability of the Chinese society with concern rather than with complacency. In terms of the rate of increase of cases, in both categories it was slower in 2010–2014 than in 2000–2010. The rate of increase at which criminal cases were filed reduced from 5.1% in 2000–2010 to 2.3% in 2010–2014, while for public security cases, the rate of increase reduced from 12.2% to −2%. What this tells us is that even though social stability challenges remain, there is some assurance to be found. The CPC Central Committee’s focus on “people-oriented” scientific development and building a harmonious socialist society is a contributing factor. As social governance strengthens, public services and basic social welfare coverage will only broaden, and that should alleviate social conflicts, particularly those arising during the course of development.⁶

Fig. 3.6

Criminal and public security cases statistics (2000–2014). (Source: China Statistical Yearbook 2015)

In China, it is said that “transformation is the absolute principle”. This refers to the changes the country is experiencing—from accelerating development itself to accelerating transformation of the mode of development, and at the heart of this is social transformation, not just economic. This ought to be the principal mindset guiding China’s development—accelerate socio-economic transformations, maximize net socio-economic welfare and minimize the cost of development. This requires us to liberate our thinking and move away from the dogmatic principles that dictate growth is the top priority, to not hinge everything on GDP figures and to do away with the tenet that economy is everything.

3.1.6 Political Development and Political Stability

Political stability is the premise of economic development; political development is the premise of social development; together, political stability and political development form the pre-conditions to enable a middle-income country to sidestep the “middle income trap”. The relationship between political development and political stability is one of mutual support and mutual advancement. Without political stability, development cannot be safeguarded, and without political development, stability cannot be safeguarded in the long run. Since the reform and opening-up, China’s rapid economic growth has fundamentally relied on the overall political stability, while political development made strides. To a large extent, this was possible because the Communist Party of China (CPC) did not cling to ideological doctrines, but rather adhered to the governance principle of “putting the people first”, learned from experience during the course of development, improved its strategic planning capabilities and was pragmatic in handling internal and external challenges.

In the early days of the reform and opening-up, as the ruling party, the CPC returned to the mentality of seeking facts and pragmatism, setting out a path for the Party with “economic construction at the core” and “adhering to the four fundamental principles and reform and opening up”. It applied the Constitution in practice and pushed economic reform forward. These are all significant political developments. Logically speaking, without such political development, China would not have been able to sustain nearly 40 years of high-speed economic growth since the reform and opening-up. We can go further and say, China’s political development was, to a large extent, built upon the foundation of political stability.

Nonetheless, threats to China’s political stability exist, both internal and external. On the external front, because of ideological prejudices, certain Western countries have disregarded China’s achievements and choose instead to criticize, negate or even smear China for the problems that emerged during development. These countries are disapproving of issues such as democracy, human rights and ethnic minority rights, and often tout the “China collapse” theory. Now, nearly 40 years on since the reform and opening-up and as China moves into a prominent position on the world economic and political stage, we are hearing the “China threat” theory. This even descends into interference in China’s core interests of sovereignty and territorial integrity, painting China as the saboteur of regional peace, thus negating China’s actual efforts to safeguard peace internationally. It is undeniable that as China rises, its international standing has not simply become stronger; instead, it faces a somewhat deteriorating international environment.

While we cannot overlook the external impact on China’s political stability, we must acknowledge that the bigger threat is internal. Now that China is in the middle-income stage, as society continues to open up and internet-use proliferates, views that are jeopardous to stability disseminate with more ease. One idea that has had a particular foothold is that, with China’s increasingly globalized market economy, the natural next step is adopting a Western democratic system. It seems to uphold Western democracy as “divine”. Some people see problems such as corruption and group unrest as attributable to the lack of a Western democratic system. Additionally, as urbanization progresses, destabilizing “black swan” events could occur more frequently with magnified reach. All these negative incidents combined with adverse social views would directly shake political stability.

The aforementioned idea is erroneous for the following reasons. Firstly, it excessively glorifies Western democracy. Take the U.S. for example, it holds itself up as the champion of democracy and human rights, yet it is not short of problems at home. Its human rights record is patchy at best—its out-of-control gun laws, police brutality, racial inequalities and inadequate protection for vulnerable groups. Let us look at the American democratic system in practice: during every presidential election, both Democrats and Republicans avidly make promises to voters, but how many of these promises are kept? On the surface, the system advocates equality of rights—“one person, one vote”, but what it fails to disguise is the influence of money on votes. In a sense, money has become the “lubricant” in American politics. Vested interest groups make political donations that trickle through other media for their own gains—this is, in fact, grossly unjust. In 2010, the Supreme Court ruled to remove caps on corporate donations to campaigns, enabling financially powerful corporations to back candidates that will benefit their businesses, and in reverse, deter candidates whose policies do not work in their favor.

The influence exerted by interest groups and lobbyists not only distorts democracy, but also erodes the effective running of government and in practice, creating a “vetocracy”, which results in a political system prone to the whims of the rich with their powerful finances, while bills beneficial to ordinary citizens are liable to being delayed or shelved. Case in point: healthcare. President Carter proposed universal healthcare coverage reforms in 1976 but ultimately failed to push them through. Reagan’s attempt in 1989 to expand Medicare coverage in order to protect the elderly from “catastrophic” medical expenses, as well as Clinton’s universal healthcare initiative in 1994 were both shot down by Congress. It was only in 2010 that Congress passed President Obama’s Affordable Care Act. Reform of the healthcare system that concerns all Americans took 35 years from proposal to approval. In 2014, there were still 33 million people in the U.S. without medical insurance—that is more than 10% of the population.⁷ Yet as soon as Donald Trump took the presidential post, he sought to repeal Obamacare, casting it down to just a short-lived bill. The U.S. remains the only developed country that does not provide universal medical care. In contrast, China, despite being a developing country, has in place a system of basic insurance coverage for all.

Secondly, the view in question reflects an incomplete understanding of China’s political development. Since the reform and opening-up, China has been working to perfect its systems of the National People’s Congress and People’s Political Consultative Conference, in order to form a socialist consultative democracy. As early as 1981, at the Sixth Plenary Session of the 11th CPC Central Committee, the Party laid out its central tenet of “all is for the people, all depends on the people, from the people, to the people”. This was the path followed by the CPC in governance. We can see from the annual “Two Sessions” that the delegates of the National People’s Congress and CPPCC members exercise their democratic rights to put forward motions and proposals related to people’s livelihoods. In 2015, the CPC Central Committee issued The Opinions on Strengthening the Construction of a Socialist Consultative Democracy, which discussed the arrangements of consultations at various levels, such as party, congress, government, political, public organizations, grassroots and social organizations. Overall, democracy in China manifests itself in the government’s widely collecting people’s opinions on development, and responding to those through active policy-making.

For China, political stability and social order are the highest priority for the people, and are the premise for continued economic development. As the country looks to stride past the “middle income trap”, it must cautiously choose its direction for social reforms and political development, in order to achieve advancements, while avoiding social and political upheavals. Having experienced 40 years of reform and opening-up, both the CPC and the public are becoming ever more rational, mature and smart in seeking a democratic system that meets Chinese circumstances, has Chinese characteristics and is beneficial to the country’s political development, stability and overall advancement.

There are challenges facing China’s political development, one root cause being the current critical stage that the reforms have reached. Deepening reform is a formidable and complex task, and it is further complicated by the reshuffling of interests, which could lead to entities with vested interests to obstruct reform under the guise of safeguarding political stability. Without question, a halt to deepening reforms is a halt to political development, which ultimately would rock political stability. The fundamental purpose of political development, after all, is to lay the groundwork for and to safeguard reform.

In this sense, the “middle income trap” is essentially a political trap. Therefore, building a stable political environment is key to avoiding the “middle income trap”. This is what the Chinese mean by “universal order”; it is also the ultimate public service product that guarantees a country’s long-term, sustainable and stable modern economic growth. And who is the public service provider? The Communist Party of China and the Chinese government—this is their obligation and a momentous task. In order to achieve this task, it is necessary to modernize the governance system and governance capability. How complete that system is and the strength of governance capability reflects more than a nation’s competitive quality globally, as well as the overall strength of a nation. Without a modern governance system in place and fairly strong governance capability, the conflicts and problems that arise in the course of economic development cannot be effectively managed. That means an absence of the central force and unity required for building and developing the country, which will inevitably lead to social instability, stagnation of economic growth and more grave issues. Modernizing the governance system and governance capability depends on utilizing the Chinese system’s advantages. The reality is, there is no one system that fits all. “Blindly copying another country’s system and development path without regard for national circumstances will never succeed; it will not solve any practical problems, but will cause economic stagnation, political change, social upheaval, loss of sovereignty and other severe consequences”.⁸ Thus, modernization of the governance system and governance capability is an important means to overcome the political trap.

3.2 Favorable Conditions for China to Overcome the “Middle Income Trap”

From a perspective of public policy, which factors should we highlight which could cause growth to stagnate or even go into recession? The answer is many, but we believe these boil down to a few points. One, the implementation of the correct development strategy; two, the implementation of correct macroeconomic management; three, basic capacity for sustainable growth (e.g. infrastructure facilities, human capital); four, basic capacity for continued innovation; and five, capacity to counter external impact and risks. Judging from the above five points, China is entirely able to cross over the “middle income trap” and complete the transition from the middle-income to high-income phase.

3.2.1 Steady Transition of the Economic System and Maturing of Macroeconomic Management

Since the reform and opening-up, China’s macroeconomic management system has matured and adapted to the needs of building a socialist market economy, while guaranteeing the overall stability of the macro economy and realizing high-speed economic growth. Collectively, the macroeconomic management system was suited to the key stages of economic reform, which included phasing in market mechanisms to the planned economy system, operating a planned commercial economy, establishing a socialist market economic system, and perfecting the socialist market economy.

From 1978 to 1984, China introduced market mechanisms within its planned economy system. On November 26, 1979, Deng Xiaoping voiced his epoch-making view that a market economy can be developed under socialism. At the 12th National Party Congress in 1982, the idea of “ensuring the leading role of the planned economy, supplemented by market regulations” was put forward. This not only endorsed market regulations, but also distinguished between mandatory and guidance planning. During this time, farmland was reformed to institute the household contract responsibility systems reforms, and certain industrial enterprises were given greater autonomy. At the Third Plenary Session of the 12th CPC Central Committee in October 1984, the CPC Central Committee’s Decision on the Reform of the Economic System was passed, which formally raised the concept of a planned commodities economy as the basis of a socialist economy. In 1987, the 13th CPC National Congress report further pointed out that a socialist planned commodities economy should incorporate both planned and market systems. China also took steps to reform various macroeconomic control mechanisms, such as planning, investment, fiscal, finance, circulation, pricing, distribution and social welfare, in order to adapt to market changes and the ensuing economic reforms.

In 1992, Deng Xiaoping said in a speech whilst touring in southern China, that China has broken free of ideological tethers in its attempt to build a market economy system. He said, “the proportion of planning and that of market forces is not the essential difference between socialism and capitalism. A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity”. Based on Deng Xiaoping’s assertion, the 14th National Party Congress Report clearly outlined that the goal of reforming China’s economic system is to build a socialist market economic system. The Third Plenary of the 14th CPC Central Committee in 1993 unanimously passed the Decisions of the CPC Central Committee on Issues of Building a Socialist Market Economy, which laid out the framework for a socialist market economy. From here on, every third plenary session arranged for building and refining the market economy system.

The Third Plenary of the 12th CPC Central Committee, the Third Plenary of the 14th CPC Central Committee, the Third Plenary of the 16th CPC Central Committee, and the Third Plenary of the 18th CPC Central Committee all laid out top-down designs for China’s economic reform, and deepened efforts to build a socialist market economy. In this process, the plenary sessions clarified the relationship between government and market, as well as government and society, and upon this basis continually improved macroeconomic management in order to adapt to the developing socialist market economy.

Once the goal of moving toward a market economy was set, China began a vigorous drive to reform state-owned enterprises with the core aim of establishing modern enterprise systems. At the same time, the country pushed for the development of the non-public sector to cultivate the micro-foundations of the market economy. China also continually made improvements to its macroeconomic regulations to complement the practical needs of the socialist market economy. In 1994, China began to reform its tax system, with tax distribution as the prime feature, and formally aligned the Renminbi’s official exchange and swap market exchange rates, implementing a managed floating exchange rate system based on market supply and demand. At the 9th National People’s Congress in 1998, Premier Zhu Rongji proposed what he termed the “one goal to ensure, three tasks to accomplish, and five areas to undergo reform”. This included several reforms in areas of macroeconomic management, such as of the financial, grain circulation, investment and financing, housing, healthcare and fiscal and taxation systems. These reforms not only effectively allayed the adverse impact of the Asian financial crisis on the Chinese economy in the late 1990s, but also paved the way for China’s membership of the WTO within the socialist market economy framework.

In the twenty-first century, China continued to work toward advancing its macroeconomic regulation and market economy. The Third Plenary Session of the 16th CPC Central Committee in 2003 approved the Decisions of the CPC Central Committee on Issues of Completing the Socialist Economy System, which laid out comprehensive plans to this end. This included continuing to build an economic system that has public ownership as its mainstay but with a diversified-ownership model as the basis. This also put forward the “five balances”: balancing urban and rural development, development among regions, economic and social development, man and nature, and domestic development and opening-up to the outside world. It emphasized cultivating a unified and open market system with orderly competition, improving macroeconomic regulations, and perfecting employment and social security systems. In 2012, the Third Plenary Session of the 18th CPC Central Committee charted 336 reform measures needed for modernizing the country’s governance system and governance capability. In particular, the session clarified: “Economic system reform is the focus of comprehensively deepening the reform. The underlying issue is how to strike a balance between the role of the government and that of the market, letting the market play the decisive role in allocating resources and the government play its functions better”.

On the whole, China’s macroeconomic management capability has been maturing steadily since the 1990s, and provided a solid foundation for continued economic growth. Looking at the four key macroeconomic performance indicators (economic growth, inflation, unemployment and balance of international payments), we could say that the overall picture for China after 1992 is rosy. When it comes to economic growth, the average annual growth rate in 1992–2016 was 9.6%. Per capita GDP in 2016 was 7.7 times than in 1992. There was an obvious slowdown in the growth rate after 2007—from 14.2% in 2007 to 6.7% in 2016. However, this was mostly due to falling external demand brought about by the global financial crisis combined with internal structural adjustments, not an indication of an underlying decline of productivity in the long run. It is worth noting that the slowdown in growth rate is not unprecedented since the reform and opening-up. Growth rate slipped from 15.2% to 8.8% in 1984–1986 (down 6.4 percentage points in two years); in 1987–1990 it slipped from 11.3% to 3.8% (down 8.5 percentage points in three years); and then in 1984–1986, it slipped from 14.2% to 7.8% (down 6.4 percentage points in six years).

In terms of inflation, since the reform and opening-up, China has never experienced the hyperinflation that Latin American countries went through. In those 20 years since the 1990s, aside from a bout of high inflation in 1994 and 1995 which reached around 20%, inflation was generally kept under 6% and in most years under 4%. Compared with most emerging economies, China’s inflation record is exemplary. Inflation levels can reflect the competence of a macroeconomic regulator in making adjustments through fiscal and monetary policies, and give clues as to whether the government is taking the “helping hands” or “grabbing hands” approach in macroeconomic regulations. The “helping hands” approach not only acknowledges the “invisible hand” of the market in distributing resources, but also proactively extends “visible hands” to remedy areas where the market fails. An example would be intensifying infrastructure construction in order to provide a more efficient market environment for the private sector, or improving public services to boost social stability and eliminate risks, thereby creating a harmonious environment for economic development. In contrast, the “grabbing hands” behavior is destructive and impedes the market; it spawns unfair income distribution and is often accompanied by high inflation, which hinders investment activities and causes steep depreciation of the public’s financial assets; the result is—the public suffers.

On the matter of unemployment, China’s registered urban unemployment rate has always stayed below 5%, and from 2010 onward, the rate remained below 4.1%. China has not yet released its full surveyed unemployment rate. Nonetheless, because of the active employment policies implemented since the 1990s and the major drive to develop the private sector and encourage informal employment, the scale of urban employment has been continually expanding—from 190 million people in 1995 to 232 million people in 2010, and rising again to 404 million people in 2015. Non-state entities were the main source of newly created jobs in urban areas. To cite some examples, during the 11th Five-Year Plan (2006–2010), the number of employed people in urban areas increased by 62.98 million, while in state-owned enterprises it only increased by 280,000 people. During the 12th Five-Year Plan (2011–2015), the number of employed people in urban areas increased by 57.23 million people, while state-owned enterprises saw a drop in employment of 3.08 million people. Suffice to say, developing the private sector is bound to be the stabilizer for job creation in urban areas.

Turning to the balance of payments, since 1994, China’s current account and capital and financial account have seen twin surpluses. This has built up a sizeable foreign exchange reserve and strengthened China’s ability to weather global financial risks. Once China joined the WTO, its participation in the global economy expanded rapidly. Total import-export of goods rose from 509.7 billion US dollars in 2001 to 4.3015 trillion US dollars in 2015, and in terms of proportion of GDP, that is an increase from 38.5% to 41% (2006 saw a peak of 65%). In 2013, China became the biggest trading nation in the world and the biggest trading partner of more than 120 countries. In 2014–2016, feeling the impact of a global trade slowdown, China’s foreign trade in goods saw negative growth, but its net export remained in the black.

3.2.2 Continual Improvement in National Capacity for Strategic Planning

China’s national strategic planning is evident in both the CPC congresses and the “Five-Year Plans”; the latter is also a blueprint charting development at different stages. In the early days after the foundation of New China, the country began to implement the Five-Year Plans with the assistance of the Soviet Union. In those days of the planned economy, national plans were the main instrument to allocate resources. As China initiated the reform and opening-up however, the market increasingly took on this function, and China no longer stuck to the old ways of a planned economy. The 14th CPC National Congress Report expressly said the Chinese economy is transitioning toward a socialist market economy, and that is to give the market a fundamental role of distributing resources, under the nation’s macro regulations.

The Ninth Five-Year Plan was the first five-year plan set after Deng Xiaoping’s southern China tour. Its full title is “The Outline of the Ninth Five-Year Plan for National Economic and Social Development and the Long-range Objectives to the Year 2010 of the People’s Republic of China”. This was also China’s first medium-to-long term plan after it switched to the path of a market economy, and was a cross-century development plan that gazed forward 15 years. Two all-encompassing fundamental changes comprised the main track of the Ninth Five-Year Plan. One is the transformation from a traditional planned economy, while the other is the transformation from an extensive to intensive mode of growth, which would enable a sustainable, fast, healthy development, and social progress. These two fundamental transformations affect both the economic system and the economic growth model, while economic reforms also facilitated the transformation to a more efficient growth model. These two fundamental transformations dictated the main track of China’s development and reform: the need to advance productivity and to adjust the relations of production. This dynamic process requires reciprocal adaptation and continuous adjustments. Undoubtedly, this was not a task that could be completed within a five-year-plan period, but rather took 20 odd years. The Tenth Five-Year Plan (2001–2005) was the first five-year plan upon the turn of the twenty-first century; China had moved from a low-income stage to a middle-income stage and joined the World Trade Organization. The Tenth Five-Year Plan outlined important tasks, including correctly balance reform, development and stability, abide by the principle of aligning speed and efficiency to transform the growth model, maximize the market mechanism, stand by the strategy of sustainable development, and gradually reduce the development gap among regions. Overall, the Tenth Five-Year Plan puts a clearer emphasis on balanced development.

As China continued to build and complete its socialist market economy, it tweaked the name of its five-year plans to mean “five-year guidelines” from the 11th round of 2006–2010 and onward, and categorized the development goals into “binding” and “anticipated”. The two categories of targets reflect on both the “invisible hand” of the market in allocating resources, and the “visible hand” of the guidelines in facilitating the process which is also the important function of the government in guiding development. In practice, macro-control by the government is indispensable because the market can fail, so guidelines are the starting point of macro-control which encapsulate the aspired goals. “Binding targets” were set mainly in the areas of energy conservation, environment protection and people’s livelihoods, which goes to show that since the 11th Five-Year Guideline, national development has put special emphasis on the quality of development and the shared nature of the outcomes.

Since the 11th Five-Year Guideline, China has generally put the focus on managing the objectives of the guidelines. If we examine how these guidelines are set, we can see that it is a process that condenses all the understandings of social development and involves wide social participation; it is a display of democracy in a sense. Regarding development strategy, such guidelines have become the steering wheel of the nation’s development. The very concept and objectives of the five-year guidelines increasingly reflect the adaptive quality, comprehensiveness, scientific and steering nature of the nation’s development. They embody changes in the government’s functions, the drive to strengthen social harmony, accelerate transformation of the mode of growth, make “green development” goals binding and push the transformation of the development model from a pure pursuit of economic growth speed to a “scientific” one—which is comprehensive, inclusive, balanced and sustainable.

The 11th Five-Year Guideline focused on accelerating the transformation of the economic growth model, making resource efficiency a national policy, accelerating the construction of a “resource-conserving, environmentally friendly society”, balancing economic development with the population, resources and environment, advancing the informatization of society, and seeking a feasible new type of industrialization. The 12th Five-Year Guidelines revolved around scientific development, and focused on transforming the economic development model based on economic structural adjustments. The 13th Five-Year Guidelines made supply-side structural reform the primary means to bring about economic structural adjustments, and touted the five development concepts of “innovation, coordination, greening, opening-up and sharing” to comprehensively realize a moderately prosperous society in 2020.

From the Ninth Five-Year Plan objective of accelerating the model of economic growth to the 13th Five-Year Guideline objective of supply-side structural reform, it appears that China’s economic development path has been generally consistent. China identified the strategy of economic structural adjustment as its basic direction, and has expanded and enriched it. This required an economy that was sustainable and stable with high speed, persistent economic structural adjustments, improvements and upgrade, and with a focus on the quality of economic development.

From the 11th Five-Year Guideline onward, China’s economic development moved gradually onto a scientific development track and realized the shift in development mode. The country saw an obvious dip in social cost, resource expenditure, and ecological cost, as well as an improvement in production safety. It saw the disparity in regional productivity narrow, better use of resources, reduction in environmental pollutant emissions, and a turnaround in the environment and ecological systems. The 13th Five-Year Guideline period is a critical period for scientific development. Guided by the five major development concepts, it requires comprehensive supply-side structural reform, adaptation to the economic new normal, realization of green, harmonious and sustainable development, in order to build a moderately prosperous society by 2020 and lay the developmental groundwork for the country to bypass the “middle income trap”.

To date, China has already implemented 13 five-year plans or guidelines. These inclusive outlines, serving as a conscious control on development, have become the blueprint and program of action for Chinese development. In setting out clear objectives, tasks, strategies, policies and measures suited to each developmental phase, they are oriented toward the overall, balanced and long-term development of the country, and are based on goal-oriented governance. Looking at how strategies have been adjusted at each stage since the reform and opening-up, it is apparent that the development strategy has not followed any one dogmatic method, but rather continued to reform and yield results by utilizing the “invisible hand” of the market, exploring the government’s “visible hand” in macro-control and planning, mobilizing proactiveness at both central and regional levels, and effectively incorporating an efficient market with a useful government. This explains how the Chinese economy has been able to sustain the relatively high-speed growth for so long.

It is necessary to note that China’s development strategies do not simply revolve around the five-year periods. Longer-term objectives are set during CPC congresses. Take for example the 12th CPC National Congress Report in 1982, which stated that on the premise of increasing economic efficiency, in the two decades from 1981 to the end of the twentieth century, China’s central economic objective was to double the annual national agricultural production value, and bring its citizens’ material and cultural quality of life to a “moderately prosperous” level. This was the first mention of “moderately prosperous” as a long-term development target, though the notion then was limited to looking at the quality of life from an income angle. In the 15th CPC National Congress Report in 1997, it was stated as an objective, that the first decade of the twenty-first century should see gross national production double from the turn of the century, in order to enrich citizens’ moderately prosperous living standards.

In 2002, the 16th CPC National Congress voiced for the first time the idea of building a “prosperous society”—a far more multi-faceted concept that goes beyond the initial “moderately prosperous living”. The Congress report stated that the first two decades of the twenty-first century is an important period filled with strategic opportunities for China, one that must be seized and utilized. The CPC Central Committee clarified that in those two decades, it is necessary to concentrate strength and comprehensively build a better-off moderately prosperous society to benefit the billion-people population. The State Development Planning Commission Director at the time, Zeng Peiyan, listed three indicators to measure the moderately prosperous society by 2020. The first is a measure of wealth—with per capita GDP growing annually at 7.2%, and at more than 3000 US dollars by 2020. The second is a measure of urbanization—with the rate growing by one percentage point each year and exceeding 50% by 2020. The third is a measure of industrialization—seeing agriculture account for less than 30% of employment by 2020. The fact is, China has met these above targets ahead of plan: GDP in 2015 is 3.96 times more than that in the year 2000 and per capita GDP has reached 8000 US dollars (current rate); the urbanization rate is 56.19%; and agricultural employment has dropped to 28.3% of total employment. The country has smoothly stepped into the middle-income phase, and raised the bar for building a moderately prosperous society.⁹

The 18th CPC National Congress further clarified the development objective of “building a moderately prosperous society by 2020”. General Secretary Xi Jinping views lifting the rural impoverished population out of poverty as the toughest task ahead in fulfilling this objective. The definition of “moderately prosperous” evolved once again. In the past, it was meant as raising the average standard of life for citizens—an “average” was enough. For example, going back to the 1997 15th CPC National Congress report, it was said the first decade of the twenty-first century should see GNP double from the number at the turn of the century, in order to enrich citizens’ moderately prosperous living standards. However, making “lifting the rural impoverished population out of poverty” the gauge for attaining a moderately prosperous society establishes a “bottom line”. In other words, it is more than just raising the average standard of life for citizens; more importantly, it is about lifting the most impoverished population out of poverty. Fully eradicating poverty goes beyond lifting income levels above the poverty line, but also guaranteeing that basic public services for the underprivileged population is close to the average national standards. What this also shows is that China has not only set the poverty bar higher than that of the World Bank, its poverty alleviation targets are also of a higher standard and are enshrined in its national development goals. In particular, the demand on public services to reach an average national standard is in practice a great safeguard, as it recognizes the vulnerability of families that have just been lifted out of poverty, and reduces the risk of them “returning to poverty” because they cannot afford hefty medical bills and such.

The phrase “moderately prosperous” has been associated with Chinese development goals for nearly 40 years now. From when the phrase was first raised in 1979, it has evolved many times, from the initial “moderately prosperous living” to “moderately prosperous levels” to “overall moderately prosperous” to “all-round moderately prosperous” and finally to the “comprehensive moderately prosperous society” we are familiar with today. This evolution reflects the ruling party’s promise to the nation, as well as the consistency in the CPC’s development goals and strategic phases.

Another area where we can identify the CPC’s strategic thinking on development is the “two centenary goals”, which was first raised in 1997 in the 15th CPC National Congress report. The two goals stated: when the CPC completes 100 years of its founding, China will have built a more developed economy with well-rounded systems; and when the People’s Republic of China turns 100, China will have realized modernization, and built a prosperous, democratic, civilized socialist country. In 2012, the “two centenary goals” were revised in the 18th CPC National Congress report to say: in the new century, the economic and social development strategic target is to consolidate and advance the moderately prosperous standards, which have been preliminarily met. When the CPC completes 100 years since its founding, a high standard moderately prosperous society that benefits the billion-people population will be built; and when the PRC turns 100, per capita GDP will meet the standards of developed countries, and the country will realize modernization. The “two centenary goals” will be the key phrase associated with China’s development strategy post-2020.

Overall, the CPC, as the ruling party, has a mature system to thoroughly arrange and draw up development strategies in all fields. This is evident in all the CPC’s National Congress reports and plenary sessions. Normally, the third plenary is primarily for setting economic and reform agenda, the fifth plenary discusses the next five-year guideline, while the fourth and sixth plenaries touch upon Party building, law and governance, cultural and social matters. The decisions made at these sessions are held up as the consensus with which the CPC will govern the country, as well as reflect the evolving duty and promises the CPC endeavors to fulfill for the nation.

Take the plenary sessions held since the 18th CPC National Congress as an example—the CPC Central Committee has clearly outlined the development goals and governing methods in the approved decisions. The Third Plenary Session of the 18th CPC Central Committee laid out the strategy for all-round deepening reform for 2013–2020. The plenary decision is referred to as the blueprint of development through deepening reform with General Secretary Xi Jinping at the core of the CPC, and reflects the firm political determination to push forward with reforms. It clearly states the grand goal of “modernizing the national governance system and governing capability”, and has elevated the role of the market in resource allocation from “basic” to “decisive”. Additionally, the decision drew up a clear and unequivocal list of tasks to complete by 2020, including 60 areas needing all-round deepening reform, and 336 detailed measures, all of which are up for assessment by 2020. This indicates that the CPC is endeavoring to meet its political promises of fulfilling long-term national development goals.

The Fourth Plenary Session of the 18th CPC Central Committee made important arrangements for strengthening the rule of law, and stressed it should be the basis for governance and politics. This was the first time that rule of law was made a central topic at a plenary session. The Fourth Plenary stated: law is a powerful tool of governance, and good law is the premise of good governance; justice is the lifeline of the rule of law, the authority of law derives from the people’s heart and sincere belief; the vitality of law lies in implementation, as does the authority of law. The decision clarified the important task of advancing the rule of law, including perfecting a socialist legal system with Chinese characteristics with the Constitution at its core and strengthening implementation of the Constitution, enhancing administration according to the law and accelerating construction of a rule of law government, guaranteeing judicial justice and raising judicial credibility, strengthening public awareness of rule of law and advancing the construction of a rule of law society, strengthening construction of a rule of law working team, and strengthening and reforming the leadership of the CPC in advancing the rule of law. All in all, the Fourth Plenary of the 18th CPC Central Committee put forward a top-down design for comprehensively advancing the rule of law, and charted a new road map for the country to perfect its legal system and enhance modernization of its governance system and governing capacity.

The Fifth Plenary Session of the 18th CPC Central Committee proposed a new concept, new thinking and new measures in relation to the Chinese economy entering a new normal and the goal of building an all-round moderately prosperous society by 2020. The session assessed the development situation, and deemed the country to be facing major strategic opportunities, but also steep challenges and conflict. Thus, the session adopted the CPC Central Committee’s Proposal on Formulating the Thirteenth Five-year Plan (2016–2020) on National Economic and Social Development, which set out the five major development concepts of innovation, coordination, greening, opening-up and sharing. This is both a highly concise extraction of past experiences in development, and is also a strategic mindset for solving the biggest problems in contemporary Chinese development.

The Fifth Plenary of the 18th CPC Central Committee also raised new objectives of building an all-round moderately prosperous society. It sought to keep a medium-to-high speed economic growth on the basis of enhancing the balance, inclusiveness and sustainability of development, and double 2010’s GDP and urban rural incomes by 2020, move industry toward a medium-to-high level, make consumption a bigger contributor to growth and increase urbanization. Other objectives included more achievements in modernizing the agricultural sector, raise the standard and quality of living for citizens, lift the rural population living under the national poverty line out of poverty so there is no longer any impoverished counties and regions, raise the standard of a civilized society, improve the ecological environment, refine and mature all systems and go further in modernizing the national governance system and governing capacity. Furthermore, at the end of 2015, the CPC Central Committee proposed supply-side structural reforms and made these a top priority of development during the 13th Five-Year Guideline period, which will guide economic structural transformations and improve the quality and efficiency of growth in the new normal era.

In summary, since the 18th CPC National Congress, the CPC Central Committee has charted out key strategies for different phases, major focus areas and general direction of development. At the National Congress itself followed by the third and fourth plenary sessions, the CPC raised the “four comprehensives” strategy, which comprises of “comprehensively building a moderately prosperous society”, “comprehensively deepening reform”, “comprehensively advancing the rule of law” and “comprehensively running the Party strictly”—the last was raised on October 8, 2014, at a conference for party education. It sought to advance the five major areas stated in the 18th CPC National Congress report: the economy, politics, culture, society and ecological development. We believe that China is capable of realizing a basically modernized governance system and governing capability by 2020, which will lay the foundation for China’s march toward a high-income nation.

3.2.3 Modernized Infrastructure Provides Essential Support for Economic Development

China is in the stage of accelerated modernization of infrastructure development. Since 2001, transportation, communication and energy, among other major infrastructural areas, have seen rapid advancements and function both as the foundation and engine for economic development.

In terms of transportation infrastructure, China had begun building highways since the late 1980s, and construction sped up in the 1990s. In 1995, the network of highways totaled a mere 2100 kilometers; in 2000, it increased to 16,300 kilometers, roughly eight times the length in 1995. In 2005, the highways spanned 41,000 kilometers, 2.5 times more than in 2000. Then in 2015, that number became 123,000 kilometers, tripling the 2005 length. Railway infrastructure entered a fast development phase in 2008. From 1980 to 2008, the operational mileage rose from 53,300 kilometers to 79,700 kilometers, an extension of 24,600 kilometers, which averages out to be 879 kilometers per year. However, from 2008 to 2015, the operational mileage expanded to 121,000 kilometers, a difference of 43,100 kilometers, which is an annual average extension of 6157 kilometers.

High-speed rail is a highlight in particular when it comes to China’s transportation infrastructure expansion, and it is also an important symbol of China’s infrastructure upgrade. High-speed rail went from non-existent in 2008 to an operation mileage network of 19,800 kilometers in 2015 (see Fig. 3.7), more than the total sum of other countries. It signified infrastructure development made in leaps and bounds. Together, high-speed rail and others comprise more than 40,000 kilometers of rapid transit network, and have basically covered all provinces and cities with a population of more than 500,000. In the 13th Five-Year Guideline, the goal was set for high-speed railways to operate across 30,000 kilometers of track by 2020 and cover 80% of the major cities. According to the Medium and Long-term Railway Network Plan issued in July 2016, the entire railway network aims to reach 175,000 kilometers by 2025, with high-speed railway to account for 38,000 kilometers. The plan aims to expand coverage and improve the road systems to play a key role in guaranteeing economic and social development. Looking ahead to 2030, it is expected that the transportation network will have extensive coverage, connecting areas with multiple travel options, linking up all provincial capitals with high-speed trains, enabling fast travel between cities, and covering most county areas.

Fig. 3.7

Transport infrastructure (1980–2015, ten thousand kilometers). (Source: China Statistical Yearbook 2016)

Moving on to energy infrastructure: the main phase of development was after the year 2000. The installed power generating capacity increased from 3.19 gigawatts in 2000 to 15.25 gigawatts in 2015, averaging at around 11% year-on-year growth, which was sufficient for the high-speed economic development at the time. Pipeline transportation of gas rose from a mileage of 24,700 kilometers in 2000 to 108,700 kilometers in 2015 (see Fig. 3.8). Aside from the increasing scale of infrastructure construction, construction in various energy fields significantly improved cross-regional energy configuration. One feature of China is the uneven spread of the population, resource reserves and level of development across the country. Generally, the western regions have rich resources, but their population density and economic development lag behind that of eastern regions. In terms of the distribution of energy resources, coal reserves are mainly in the north, hydroelectric resources in the southwest, and gas reserves in the west. Meanwhile the east is the most economically developed and also where energy consumption is concentrated. In order to bridge the spatial difference between where energy is produced and where it is consumed, energy infrastructure construction provides instrumental support to economic development. Since China launched its “western development strategy” in 2000, projects such as the “west-east gas pipeline” and “west-east electricity transmission” have been made a priority in the development of western regions. The energy configuration structure was essentially settled in this manner, and this has helped to balance regional development. Post-2004, a trend of convergence could be seen in development among China’s various regions.

Fig. 3.8

Energy infrastructure (1980–2015). (Source: China Statistical Yearbook 2016)

The advancement in communication infrastructure could be viewed as the biggest highlight of China’s twenty-first century development, especially in modernized communication facilities (mobile switch capacity and optical cable length); relative to China’s economic development levels, it is progress made in huge strides. The optical cable length in 2015 was 20 times the length in 2000, while mobile switch capacity in 2015 was 15 times the capacity in 2000 (see Fig. 3.9). The extensive upgrade in communication infrastructure is a result of the nation’s informatization strategy. The Tenth Five-Year Plan issued in 2001 raised for the first time the concept of “tri-networks integration”, referring to the integration of telecommunications, television and internet. Following this, communication infrastructure saw rapid progress in both coverage and on a technological level, especially in mobile communication and the spread of broadband. China essentially attained universal access for its citizens to communication facilities, becoming a global power in mobile communication and internet. The rapid development in communication infrastructure building has provided much support to China’s “new economy”—one that is characterized by advancements in internet and mobile communication.

Fig. 3.9

Communication infrastructure (1990–2015). (Source: China Statistical Yearbook 2016)

The 13th Five-Year Guideline proposed “speed up the construction of a new generation of high-speed, mobile, secure, ubiquitous information infrastructure, promote the wide use of information network technology, and form a world of internet space where everything is interconnected, humans and computers interact, and space and ground integrate”. The Guideline laid out the objective of fiber network coverage of all urban areas by 2020, realizing access for 98% of rural areas, optimizing the configuration of global communication network, and enhancing the construction of cross-border land and sea cables. In terms of communication technology, the Guideline encouraged research and development of 5G and super-broadband technology, promoted commercializing 5G use and laying the groundwork for the next generation of internet technology. We estimate that around 2020, China’s information infrastructure coverage and technological levels will reach a new height, making it a leader in mobile communication and internet technology, and expanding the online economy. In particular, the “Internet Plus” plan raised in the 13th Five-Year Plan will boost China’s “new economy” and become a source of support for the adjustment and upgrade of industrial structure under the economic new normal.

3.2.4 China Already Fulfills the Essential Preconditions for Innovation-Driven Development

As early as the 1980s, China began strategizing ways to improve its scientific and innovative capacity. In 1986, Deng Xiaoping endorsed the proposal of four scientists, Wang Daheng, Wang Ganchang, Yang Jiachi and Chen Fangyun, that China should develop its own advanced technologies in line with the world. After this, the State Council approved the State High Tech Development Plan (863 Program), which selected seven key technological development fields with impact on socio-economic progress, such as biotechnology and information technology. It circled 15 projects as priority areas to keep up with world standards. Deng Xiaoping made a series of science and technology related propositions. To cite a few examples: in September 1988, he made the notable remark at the National Science Conference that “science and technology are the primary productive forces”. In October that same year, while inspecting the Beijing Electron Positron Collider project, Deng said, “China must develop its own high technology, so that it can take its place in this field”.

Since the turn of the century, China’s knowledge in science and technology has further prompted innovation-driven development. In 2002, the 16th CPC National Congress raised the strategy of “enhancing capacity for independent innovation and building an innovative country”. In 2012, the 18th CPC National Congress underscored the “innovation-driven” development strategy, and insisted that China must stick to its own path of self-innovation with Chinese characteristics. With this innovation-driven development strategy in place, many medium- and long-term plans were set to this end, such as the National Medium and Long-Term Program for Science and Technology Development (2006–2020) in 2006; National Outline for Medium and Long-Term Education Reform and Development (2010–2020) in 2010; and National Outline for Medium and Long-Term Talents Development (2010–2020) in 2010. These three major plans essentially laid the foundation for the “holy trinity” of innovation-driven development—education, talent and science and technology—and set out clear development goals.¹⁰ After this, China successively issued multiple national innovation and development plans, such as the 11th Five-Year Plan on National Independent Innovation Capacity Building from the State Council in January 2007; 12th Five-Year Plan on National Independent Innovation Capacity Building also from the State Council in May 2013; and 13th Five-Year Plan on Scientific and Technological Innovation in August 2016. These plans state clearly China must have its eye on the frontier of global science and technology; and integrate, digest and absorb imported innovation in order to recreate and improve its own capacity.

Aside from plans targeted at science and technology innovation, China also laid out guidelines for promoting the development of the high-tech industry. To cite a few examples, in 2007, China issued the 11th Five-Year Plan for Development of High-Tech Industries, which covered high-tech manufacturing industries such as electronic information, biology, aerospace, new materials, new energy and marine, among others. It also covered high-tech service industries such as electronic communication, internet and data content. Then in 2012, the country issued the 12th Five-Year Plan for National Strategic Emerging Industries, which accelerated incubation of the strategic emerging industries and integration of sci-tech innovation and economic development. It also outlined 20 major projects within the key industries of energy-saving and environmental protection, new generation information technology, biology, high-end equipment manufacturing, new energy, new material and new energy autos. In 2015, China proposed the “Made in China 2025” plan in line with the target of becoming a manufacturing powerhouse. There are three steps to this plan: elevate China’s role in the global manufacturing industry by 2025, raise China to a mid-ranking position among the most powerful manufacturing nations by 2035 and finally, bring the overall strength of the manufacturing industry into the leading ranks of the world’s most powerful manufacturing nations by 2049, one hundred years on from the founding of the People’s Republic of China. The “Made in China 2025” plan clarified nine strategic tasks and focal points, and eight aspects needing strategic support and guarantee.¹¹ Additionally, also in 2015, China issued the Guidance on Actively Promoting the Internet Plus Action Plan.

Aside from the aforementioned strategies, the fast upgrade in China’s human resources served as a base for innovation-driven development. Development of the education sector is a reason for the rapid accumulation of human capital, which entered a period of accelerated advancement from the end of the last century. The number of associate’s and bachelor’s degree holders rose from 950,000 in 2000 to 6.81 million in 2015, an average annual increase of 14%. The total accumulative number of such degree holders in 2000–2015 reached 60.83 million, equivalent to the population of Italy. In 2000, the number of holders of associate’s degree and above was 45.71 million nationwide, and that expanded by 3.45 times to 158 million people in 2014 (see Fig. 3.10).

Fig. 3.10

The number of associate’s, bachelor’s and master’s degree holders (1980–2015). (Source: China Statistical Yearbook 2016)

The number of master’s degree holders increased from 58,800 in 2000 to 551,500 people in 2015. The total accumulative number of such degree holders in 2000–2015 reached 4.85 million, equivalent to the population of New Zealand. Returning overseas graduates increased from 9100 people in the year 2000 to 409,100 in 2015, while the cumulative number of returning overseas graduates in 2000–2015 was 2.1 million. If we examine the ratio of returning overseas graduates to students studying abroad, we can see that it fell from 1:4.27 in 2000 to 1:1.28 in 2015 (see Fig. 3.11), indicating that domestic development conditions have made China more appealing.

Fig. 3.11

The number of students studying abroad (1980–2015). (Source: China Statistical Yearbook 2016)

Owing to the innovation-driven development strategy and support of human capital, China has also expanded investment in innovation. Take for example research and development (R&D) expenditure, it rose from 1.76% of GDP in 2010 to 2.07% of GDP in 2015, closing in on the target of 2.2% set in the 13th Five-Year Guideline and already overtaking the average levels of 28 European Union countries. The 13th Five-Year Guideline expects gross national R&D expenditure to reach 2.5% of GDP, similar to U.S. levels. A look at the source of R&D expenditure: the bulk of R&D activities are carried out by enterprises, and the financial contribution of enterprises has firmly remained above 70%, even reaching 75% in 2015; this pattern is similar to that of the developed countries.¹² In terms of patents, in 2015, there were 6.3 patents owned among every 10,000 people, already significantly exceeding the objectives set in the 12th Five-Year Guideline of 3.3 patents. The 13th Five-Year Guideline went further to set a patent ownership target of 12 out of 10,000 (see Table 3.3), elevating China’s sci-tech innovation capability to a new level.

Table 3.3 Key indicators of China’s innovation-driven development

With the advance of sci-tech innovation, we see the increasing application of the results yielded. The tech market turnover increased from 390.7 billion yuan in 2010 to 983.6 billion yuan in 2015.¹³ Internationally, the global share of the added value of China’s high-tech industry is gradually enlarging. Let us compare with the U.S.: in 2000, China’s high-tech industry took only a 2.53% share of the world’s total, while the U.S. accounted for 37.10%. But come 2015, China and the U.S. are virtually tied. The two countries are both powerhouses in the global high-tech industry, and together hold a 60% share of the world’s total value (see Fig. 3.12).

Fig. 3.12

The added value of high-tech industries in China and the U.S. as a share of the world’s total (2000–2015). (Source: Hu Angang and Ren Hao, “How China’s High-technology Industry Catches-up with United States”, Bulletin of Chinese Academy of Sciences, Issue 12, 2016)

Another measure of competitiveness in the high-tech industry is export of high-tech products. This reflects the innovation capability of a country’s high-tech industry, integrated manufacturing capability as well as its production cost advantages. If we compare again with the U.S., China’s export of high-tech products is increasingly grabbing a bigger share of the world pie, surpassing the U.S. in 2004, and leaving the U.S. far behind in 2014 (Fig. 3.13). It is necessary to point out that China’s increasing competitiveness in this sector is mostly owing to the country’s integrated manufacturing capability as well as the relative advantage it has in labor costs. In terms of high-tech innovation capability, China is improving, but that element has not yet become the export driving force of high-tech products. However, we have reason to believe that China’s independent innovation capability in the high-tech sector will eventually catch up with the developed world. Take a look at the data from the World Bank, which shows there were 1.519 million people working in R&D in China in 2014, surpassing the number in the U.S. in 2012 (1.262 million people), but below the number in the EU in 2014 (1.769 million people). We project that around the year 2020, China’s R&D sector employment will overtake the EU, and significantly exceed the U.S.

Fig. 3.13

The value of high-tech exports from China and the U.S. as a share of the world’s total (2000–2014). (Source: Hu Angang and Ren Hao, “How China’s High-Technology Industry Catches-up with United States”, Bulletin of Chinese Academy of Sciences, Issue 12, 2016)

Overall, from the turn of the century, China has been gradually shaping the mechanisms for innovation-driven development. High-tech related industries are becoming the new force behind economic development, pushing the transition from “manufactured in China” to “created in China”. The high-tech sector is moving from chasing innovation to being on the frontier of innovation on the global stage, already exceeding its initial strategic expectation of simply “having a foothold” in the sector. The 2014 Global Innovation Index released by Cornell University ranked China 29th out of 143 countries, earning it the title of an “innovation learner”. But it also has the highest score out of the “learners”, and is edging closer to innovation leaders.¹⁴ In the 2016 Global Innovation Index, China climbed up to 25th out of 128 countries, the only upper-middle income country to join the ranks of highly developed economies.¹⁵ It is remarkable that China graduated from learner in 2014 to a leader in innovation in 2016.

This is evidence that China’s sci-tech innovation capability is transitioning from “chasing after” to a phase where it is “running alongside or even overtaking” leaders of the field. This is an important period of transition from quantity to quality, from breakthrough to systematic advancement. We expect innovation-driven development strategies will take an even more central position in the nation’s bigger development picture, and China will become increasingly prominent on the global innovation map as it improves its innovative capabilities. China will be more than just an influential country in the sci-tech field, but also a leader in global innovation.

3.2.5 China’s Capacity for Green Development Continues to Grow

Looking at the global picture, China is a country with relatively low ecological resources per capita and natural resources (water, land and minerals) per capita, and as urbanization continues and the economy develops, environmental deterioration will only become a bigger concern. We could say that ecology, resources and environment are the three big hurdles for development, and also three constraints. In terms of the ecological challenge, a large part of the national land space qualifies as extremely ecologically fragile areas, and its protection is laden with difficulties. Moderately ecologically fragile zones account for 55% of the land space, while severely ecologically fragile zones account for 19.8%.¹⁶ Looking at the resource challenge, China’s main resources, including water, arable land, forests, grasslands, petroleum, natural gas, coal, account for a far smaller share of the world’s total compared to the proportion of its population.¹⁷ It is clear from this that China is a natural-resource-poor per capita nation. Moving on to the environment challenge, atmospheric pollution, soil pollution and water pollution among others present a momentous task for environmental governance, and threaten industrial, agricultural production as well as the health of citizens. China remains in a development phase of accelerated industrialization and urbanization, when demand for resources is ever growing. This explains why resources and environment will pose a serious constraint on future economic development. If China wants to bypass the “middle income trap”, it is imperative that the country does not disregard national conditions and pursue the traditional path of industrialization taken in the West of “pollute first, clean up later”; instead, it must implement green development as soon as possible.

China has been actively taking measures to address ecological concerns since the reform and opening-up, and has generally managed to contain ecological deterioration with its continued endeavors. In 1979, China initiated the “three-north” shelterbelt program to protect forests, planting large-scale forest strips in the north, northeast and northwest, eventually covering an area of 4.07 million square kilometers. To date, the “three-north” program has been in progress for nearly 40 years. It has had important impact on mitigating soil erosion, improving agricultural conditions and shoring up forestry resources in northern areas, and has contributed positively to ecological conditions there. From the end of the last century, China began to intensify ecological construction efforts. In 1999, it rolled out the “grain for green” policy—encouraging afforestation on fragile farmlands. This policy formed a crucial part of the western development strategy mentioned before, and has helped to turn around the ecological conditions in western regions by preventing soil erosion.¹⁸

From the 11th Five-Year Plan onward, China gradually rolled out and refined its green development strategy. For example, the 11th Five-Year Plan raised “building a resource-conserving, environmentally-friendly society”; the 12th Five-Year Plan proposed “green development and building a resource-conserving, environmentally-friendly society”; and the 13th Five-Year Plan set “green development” as one of the five major development concepts with which to guide economic development under the new normal. In particular, resource-related goals were classified as binding targets, and environmental protection was made a core objective of development. Both the 12th and 13th Five-Year Plans strengthened environmental targets. Take the 13th Plan as an example, actual targets related to resources and environment totaled 16, accounting for 48.5% of all targets in the Plan. Not only this, all 16 are binding targets (see Table 3.4).

Table 3.4 Distribution of main indicators in the 13th Five-Year Plan

If we assess the results, we can see that the main ecological and environmental targets were met. For example, energy consumption per unit of GDP dropped 19.1% during the 11th Five-Year Plan period, and further dropped by 18.2% during the 12th Five-Year Plan period. On the whole, as public awareness of environmental matters increases alongside economic development and urbanization, environmental management will become more complex, and is sure to pose a considerable challenge throughout China’s middle-income development phase.

3.2.6 China Actively Participates in Globalization and Global Governance

With the end of World War II, globalization has become the irreversible trend of world development, propelled by technological and market forces. Participation in globalization is an important means for developing countries to advance their economy. The economic success of the “four Asian tigers” is an example of the importance of adapting to and maximizing the opportunities presented by globalization after World War II. China’s own economic development after the reform and opening-up goes to show participation in economic globalization provided the external driver of high-speed growth. However, economic globalization is also a “double-edged sword”; ineffective handling of external impact can drag a country into economic stagnation. The 1998 Asian financial crisis and its impact on Southeast Asian nations is a case in point, while the 2008 global financial crisis similarly dragged down many emerging economies to low or negative growth. The reality is, many middle-income countries end up falling into the “middle income trap” because, to a large extent, they were unable to shield their economies effectively against external impact.

With the advent of the reform and opening-up, China went from being on the periphery of the global economy to an active participant, beneficiary and contributor. Globalization not only provided the external push needed for China’s economy, the global economy also benefited from China’s participation. China’s membership of the WTO propelled it into a new economic arena; its connection with the world grew ever closer, and as the largest import-export country, China also became the largest contributor to world trade. The 2008 financial crisis also signified a new phase of globalization for China. The country participated actively in a range of regional and international economic cooperation mechanisms, and is proactive in helping to build a fair and equitable international economic system. This is evident in the following ways.

First, China has a strategy of actively establishing bilateral and multilateral free trade agreements. The implementation of these FTAs enriches the mechanisms for China’s economic relationship with foreign countries.¹⁹ At the same time, China has set up multiple free trade pilot zones,²⁰ which are the focal points for institutional innovation, accelerating the changing role of the government, reforming the system of administrative approval, implementing the system of the negative list, opening-up investment fields, facilitating trade, further opening up the financial sector, exploring importable and replicative systems and innovations and driving the overall upgrade of the system.

Second, China has been proactively building new mechanisms for international economic cooperation. In September and October of 2013, while visiting Central Asia and Southeast Asia, President Xi Jinping proposed respectively the concepts of the “Silk Road Economic Belt” and “Twenty-first Century Maritime Silk Road”, garnering much international attention. In late 2015, the Asia Infrastructure Investment Bank (AIIB) was established, spearheaded by China, and with 57 founding members. This is an important multilateral organization to guarantee Asia’s sustainable and stable economic development. The “One Belt, One Road” initiative will give impetus to cooperation between China and all the countries along the route in multiple aspects, such as infrastructure construction, trade and investment, energy, regional integration, and Renminbi internationalization. Aided by the Silk Road Foundation and AIIB’s establishment, this has set up a new platform for China’s opening-up. The 13th Five-Year Guideline also prioritized “open development” as the development concept, encouraging active participation in economic globalization, and building a fair, reasonable, win-win international economic order. In the present climate, against the backdrop of rising anti-globalization sentiments, China has become the champion of globalization. In 2017, President Xi Jinping delivered his keynote speech at the Davos World Economic Forum, titled “Jointly Shoulder the Responsibility of Our Times, and Promote Global Growth”. He made a strong case of globalization as “win-win” for everyone, earning worldwide endorsement.²¹

China has been a stabilizing force for world trade in the last two rounds of financial crises during the past two decades. Amid the Asian financial crisis, in 1998, China made a commitment not to devalue the Renminbi, which was conducive to stabilizing Southeast Asian economies. When the global financial crisis erupted in 2008, China initially proposed a “Four Trillion Economic Stimulus Plan”, then set itself to vigorous national economic restructuring, which was crucial in stabilizing the country’s economic growth as well as the world’s. The impact of the global environment post-2008 led to a slowdown in Chinese foreign trade from high-speed growth to medium-to-high, trade surplus as a proportion of GDP narrowed, the effect of net export as an engine of economic growth weakened, which in turn led to economic growth slowing. Nonetheless, China still managed to maintain its medium-to-high-speed growth, signaling that the Chinese economy is fairly sturdy and has the capacity to ward against external impact, particularly when compared with Southeast Asian and Latin American countries.

For a start, China has a number of world-class enterprises, which forms a safeguard against external risks. The Fortune Global 500 list is a reflection of a country’s composite strength. In 2016, the revenues of Fortune Global 500 companies totaled 27.6 trillion US dollars, equivalent to 36% of the world’s GDP. If we now look at the distribution of these companies in 2016, we will see that they are based in only 29 countries (Table 3.5). A total of 298 are based in highly developed European countries and the U.S., 110 in China, 67 in Japan and South Korea, and only 25 in other developing countries (excluding China). In addition, out of the 35 OECD countries, 13 do not have any companies that made the Fortune Global 500 list. As mentioned earlier, this list is an important indication of a country’s strength.

Table 3.5 The distribution of Fortune Global 500 companies by countries (2016)

There is a correlation between changes in the distribution of Fortune Global 500 companies across the world and the relative ranking of countries by economic scale. As seen in Table 3.6 Japanese companies made the Fortune Global 500 list in 1996, but as the growth of the Japanese economy faltered in the ensuing two decades, the number of Fortune Global 500 companies also dwindled to 52 in 2016. On the other hand, the number of Chinese companies has increased the most since 1990. In 1990, only one Chinese company made to the Fortune Global 500 list; in 2000, there were ten; then in 2008, there were 30; and eventually in 2016, 110 made the list—making China the country with the second most number of Fortune Global 500 companies. This increase is also in sync with the rise of the Chinese economy to become the world’s second largest. It is estimated that by 2020, Chinese Fortune Global 500 companies will even exceed American companies.

Table 3.6 Changes in the distribution of Fortune Global 500 companies by countries (1990–2016)

Secondly, China has sizeable foreign exchange reserves, which means it is unlikely to experience the substantial currency depreciation Southeast Asian nations did in 1998 as a result of rapid outflow of short-term capital, nor the sovereign debt crisis some European nations underwent in recent years. By the end of 2016, China had 3 trillion US dollars in foreign currency reserves, slightly less than the peak of 3.84 trillion US dollars in 2014. Even though the amount of reserves has ebbed, it is still more than sufficient to cover all of China’s debt as well as half a year’s worth of foreign exchange needed for imports. This scale of fluctuation in foreign exchange reserves is normal in the long run, and there is no need to view it as a portent of a bleak economy to come.

Thirdly, China has already set in motion large-scale foreign direct investment (FDI). In 2016, Chinese non-financial FDI in 7961 overseas enterprises in 164 countries and regions totaled over 170 billion US dollars, 44.1% more than the previous year. A significant amount of investment by Chinese companies overseas is in resource-related projects, which provides a certain guarantee for future development of the Chinese economy. In addition, China is also actively accelerating its Renminbi internationalization process. The formal inclusion of the Renminbi in the International Monetary Fund’s SDR currency basket on October 1, 2016, is sure to expand the Renminbi’s circulation overseas and facilitate development of the domestic capital market. It will help the Renminbi gain favor internationally for settling cross-border trade and as a reserve currency.

3.2.7 The Superiority of the Socialist System Provides the Political Foundation for Overcoming the “Middle Income Trap”

China is a massive country of 1.38 billion people; the problems it confronts in the course of development are often the toughest in the world. The hurdles it has encountered thus far encompass practically all those predicaments faced by developing countries—each of them is an extremely hard nut to crack. Whether China can successfully bypass the “middle income tap” depends on whether it can jump these hurdles. The country’s experience since its foundation has taught us that as long as there is no “rocking the boat” or getting sidetracked, any problem can be eventually solved. What is implied by this is avoiding the setbacks inflicted when information asymmetry leads to the state (government) and society (public) blindly following others and losing the sense of “self” on a national and social level, thereby erroneously believing what they are doing is for the better, when in fact it is detrimental. Specifically, not rocking the boat economically means averting radical booms and busts in development; not rocking the boat politically means preventing vacillation in the political direction; not rocking the boat socially means deterring illegal public demonstrations of “democracy”; and not rocking the boat ecologically means refraining from damaging the ecological environment. So, how can these be achieved? Fundamentally, we must not take futile actions, but opt for a proactive and steady approach to state building. Secondly, should another party attempt to intervene and rock the boat, we must keep a solid footing, and instead of following suit, we must confidently adhere to our own path, system and retain independence in our democratic political development.

China’s development path of socialist modernization is neither ordinary nor simple. We have learned the hard way from history. From the founding of the PRC to the reform and opening-up, there have been two tumultuous times as a result of getting sidetracked. The first was on the economic front with the Great Leap Forward. During the First Five-Year Plan period, China’s GDP grew at an annual average of 9.2%, with industrial and agricultural output growth at an average of 18% and 4.5% respectively. But this was not fast enough for Mao Zedong. He first criticized Zhou Enlai and others for their opposition to his ambitions, then suggested China could “surpass the U.K. and catch up with the U.S.” and set off the Great Leap Forward movement with its sky-high targets which ultimately ended in failure. The second time was turmoil on the political front with the “Cultural Revolution”. In 1963–1965, China’s GDP grew at an average of 17.6%; even though the speed was partly owing to the economy being in recovery mode, it still signaled potential for fast development in the future. However, once again, a decision by Mao Zedong to launch the Cultural Revolution resulted in a polarized and damaged nation. In September 1981, Politburo Standing Committee member and Vice Premier of the State Council, Li Xiannian, urged the country to never again rock the boat.²² In the three decades after, we have encountered threats and stumbling blocks, but even when there was unforeseen political turbulence, we have handled trouble in time and survived the test, avoiding significant turmoil. This is the fundamental reason for the three decades of high-speed economic growth and social progress in China. Based on this, we can safely say that not “rocking the boat” is the basic safety net for China when crossing the “middle income trap”.

The world has been told the same cautionary tale. In the 1980s and 1990s, the Soviet Union and eastern European soviet states all underwent dramatic economic and political transformations, which caused a serious blow to their economies. According to Angus Maddison’s calculations of per capita GDP by purchasing power parity (PPP, 1990 Geary-Khamis/international dollars), per capita GDP in seven eastern European country did not grow past their 1990 levels (5427 US dollars) until 1998. In Yugoslavia (five countries), it took until 2005 for per capita GDP to exceed what it was in 1990 (5646 US dollars). In the Soviet Union, it was not until 2006 that per capita GDP caught up to what it was in 1990 (8513 US dollars).²³ Aside from long-term economic slowdown or stagnation, these countries also saw high unemployment and soaring inflation among other phenomena, and declining standards of living in the 1990s. In 1996, the World Bank analyzed 28 countries undergoing economic transformation in its World Development Report: From Plan to Market. It found only China and Vietnam were able to circumvent negative economic growth and sustain high-speed growth. Whereas the other 26 countries experienced different degrees of V or L shaped economic growth, in particular Ukraine and Russia.

In retrospect, China’s development successes of today are largely because the country did not sway from its path in the 1980s and 1990s, and resisted the changes spreading across the former Soviet Union and eastern European socialist states. If we posit that in the 1990s, China’s prevailing purpose was to avoid the national fragmentation, economic stagnation and political meltdown experienced by the Soviet Union and Yugoslavia as they underwent economic transformation, then we can say the prevailing purpose today is to fend off the destabilizing factors to politics and society as China prepares to emerge from the middle-income development phase.

The forces that could destabilize Chinese politics come from both the outside and inside. The external factor is that the country must not blindly import Western democracy, but rather insist on developing its own socialist democratic political system. We can see from other developing countries that have imported Western values and the Western political system, that doing so does not necessarily guarantee economic development; instead, it can cause political fracturing, turbulence and social fissures. This often results in pertinent livelihood issues being pushed aside amid political rivalries and thus sinking the country into the “democracy trap”.²⁴ To cite a few examples, Thailand’s “Red Shirts” movement, Georgia’s “Revolution of the Roses”, Ukraine’s “Orange Revolution”, Kyrgyzstan’s “Tulip Revolution”, and Tunisia’s “Jasmine Revolution”—these eventually all boiled down into a show of “street democracy” and chaos. These “color-coded revolutions” brought only political and social unrest and government changes, and meant the public could not even meet their most basic material needs. In other words, for developing countries, the “middle income trap” is essentially a “Western democracy trap”.

Internally, stable and progressive politics hinge on the CPC making relentless endeavors to improve and strengthen its leadership, as well as modernize its governance system and governance capability, in order to optimize the advantages of the socialist system and provide more for the people. In practice, since the reform and opening-up, the CPC has continued to self-improve, move with the times, meet the development aspirations of the people and the evolving national circumstances, actively deepen reform and optimize the advantages of a socialist system with Chinese characteristics. We could say that the leadership of the Party is the foundation of an optimal socialist system.

China’s biggest difference from other middle-income country is also its biggest advantage—that is, its socialist system. This will prove to be the security that will help it cross the middle-income trap. The advantages of the socialist system are not rigid; it manifests itself in different manners at different historical times, and will become more elaborate as the system becomes more refined. Whether this advantage can be utilized depends on the CPC’s leadership. Even with the setbacks of the Great Leap Forward and the Cultural Revolution before the reform and opening-up, we were still able to see the system’s superiority, for example in the progress made in raising average incomes, life expectancy and education standards. With the reform and opening-up, China abandoned the “class struggle” doctrine and established the “one central task and two basic points” political line, which was to make economic development the central task, uphold the four cardinal principles and adhere to the reform and opening-up. This political mantra ensured stability after the reform and opening-up and enabled China’s political development. It helped to shape the ensuing political consensus of the Deng Xiaoping theory, the important thought of the “Three Represents” as well as a scientific outlook on development to guide governance.

Since the reform and opening-up, we have seen in practice how China could apply foresight and flexible strategies to counter the conflicts arising from development. In regard to the political system, there are several favorable conditions that could help China bypass the “middle income trap”: one, the ability to make independent national decisions; two, the sense of crisis and urgency in leaders of the CPC Central Committee and the State Council, which leads them to take very seriously conflicts and dilemmas encountered during the middle-income development phase; and lastly, the persistence toward the socialist goal of just and equitable shared development.

The first point: China has the ability to make independent national decisions. From the late 1980s to the early 1990s, China faced the big question of what development path to take, while beholden by the international backdrop and domestic reforms. The CPC Central Committee was able to steady itself in time to firmly champion national stability, and thus prevented the country from becoming the guinea pig of “western democracy” as well as averted political upheaval, securing the nation’s autonomy. The Soviet Union and Yugoslavia are classic examples of the contrary. This also explains why so many middle-income countries struggle to join the ranks of developed countries—they lack the will to make independent decisions in regard to development and national democracy building.

If we compare China with the Soviet Union and eastern European socialist states, China’s advantages are, to a large extent, due to the country insisting on its own development path. After the dissolution of the Soviet Union and the socialist camp, instead of closing itself off, China resolved to adhere to the aspirations of its socialist market economy, joined the WTO, elected to institute currency exchange reform and determined its own macroeconomic policies and development path. It is a rare example of a developing country that did not fall prey to the “Western democracy myth”, or indiscriminately adopt the Washington Consensus economic reform package.

The leadership of the CPC ensured that Western interference in sovereign matters would be impossible, as would fostering of an “agent” or political force. Again, this is not something commonly observed in a developing country. The Chinese government has never capitulated to external pressure that came primarily from Western powers, but rather always made autonomous decisions in the interest of the nation. Even when compromise was necessary, it was only partial and for an “exchange”. This explains why China was able to buffer both the Asian and global financial crises, as well as why destabilizing forces in society are unlikely to be converted into expressions of “street democracy”. Provided there is “universal order”, it is possible to attain economic prosperity and social harmony. Otherwise, there is simply no guarantee of stable development and improvements in the quality of life.

The second point is the sense of crisis and urgency in leaders of the CPC Central Committee and the State Council leads them to take very seriously the conflicts and dilemmas encountered during the middle-income development phase. In September 1995, Comrade Jiang Zemin said reform, development and stability are deeply intertwined, and this is the most important of “twelve major relationships” in building a modernized socialist society. He stressed that nothing can be accomplished without a stable political and social environment, and emphasized that the relationship among reform, development and stability must be balanced and mutually enhancing: advance reform and development in a stable political-social environment, and bring about political-social stability with reform and development.²⁵ This is both experience distilled from China’s own successful economic development, and a lesson borrowed from the countries that had fallen into the democracy trap. This stands in sharp contrast with Soviet Union and the economic transformation of eastern European countries.

Upon entering the twenty-first century, China shifted from a low-income to a medium-low-income country. The concept of the “middle income trap” had not quite existed at the time, nonetheless, the CPC Central Committee had the foresight to predict the development challenges that could arise. In April 2003, General Secretary Hu Jintao, when visiting Guangdong province, talked about firmly adhering to a “holistic view of development”. In October of the same year, at the Third Plenary Session of the 16th CPC Central Committee, major development problems were raised, such as irrational economic structure, inadequate distribution, slow climb in farmers’ income, employment conflicts, increasing pressure on resources and the environment and insufficient competitiveness of the economy overall. It was said that these problems exist because China is still in the fledgling stage of a socialist society, with an economic system that is not yet fully formed, and many systematic obstacles in the way of productivity. The plenary session proposed putting people first, establish a comprehensive, coordinated and sustainable view of development, in order to promote social and human development.

In reference to the direction that development should take in the middle-income stage, Comrade Wen Jiabao said at a forum of ministerial and provincial officials in February 2004, that Chinese per capita GDP had reached 1000 US dollars, and could reach 3000 US dollars by 2020, based on the existing roadmap currency exchange rate at the time. This was a critical phase in development, and marked the beginning of the deep shift in socio-economic structure. The development experiences of other countries have shown that there are two possible scenarios: one is that the economy will march forward and successfully attain industrialization and modernization; the other is huge income disparity, high unemployment, widened gap between urban and rural areas and among regions, exacerbated social conflict, deteriorated ecological environment, which would cause socio-economic growth to languish, and even social upheaval and regression.²⁶ Facing the challenge of this development stage, the CPC Central Committee raised the idea of a people-oriented, “scientific outlook on development”,²⁷ abiding by a comprehensive, coordinated, sustainable development, taking all factors into consideration in handling conflict and problems, in order to avoid the latter scenario while aspiring for the former. This is both the Party’s foresight and part of its grand plan to brace for the development difficulties of the middle-income stage, in anticipation of the “middle income trap”.

The CPC Central Committee has prioritized the “middle income trap” since the 18th CPC National Congress. It has acknowledged the complexity and arduousness of crossing this trap, while expressing its confidence in succeeding. On November 10, 2014, General Secretary Xi Jinping spoke at the APEC Business Advisory Council (ABAC) Dialogue with Leaders in Beijing. He said,

For China, the ‘middle-income gap’ is bound to be crossed, and the key is when it will happen and how to better move forward after that. We have confidence in balancing reform, development and stability as well as steady growth, structural adjustment, improvement of people’s livelihood and promotion of reform, advancing China’s economy in a steady and long-term manner.²⁸

Premier Li Keqiang has also elaborated on the understanding of “middle income trap” on several occasions. For example, at the 13session of the 12 Standing Committee of theCPPCC National Committee in November 2015, he pointed out

the 13th Five-Year Plan is the decisive stage for attaining a comprehensive moderately prosperous society. To win this victory means that by 2020, China’s per capita GDP will close in on the levels of high-income countries, taking us across the ‘middle income trap’; it will be another milestone in China’s modernization. But the comprehensive moderately prosperous society will not materialize by itself, as there is no such thing as a free lunch. We face many risks and challenges, and we cannot underestimate the difficulty.

As soon as China saw the complex challenges ahead in the middle-income stage, it took active counter measures. This has become a development consensus reached by the entire Party and society: tenaciously enhance the country’s governance capability in order to successfully bridge the middle-income trap and stride toward a high-income level. Considering that this is the critical period for building a moderately prosperous society and crossing the middle-income trap, General Secretary Xi Jinping said at the Fifth Plenary Session of the 18th CPC Central Committee:

We must clearly recognize that to build a comprehensive moderately prosperous society, we are both fully equipped with the conditions and also faced with difficult tasks. The road ahead is not smooth; it is laden with conflicts, risks and complicated predicaments. If these are not properly addressed, or if we become susceptible to systematic risks, make subversive errors, the process of building a moderately prosperous society will be delayed or even halted.²⁹

With this in mind, General Secretary Xi Jinping formally proposed adhering to the five major development concepts of innovation, coordination, greening, opening-up and sharing. This is to make strategic arrangements for the “targeted remedy” at the predicaments arising out of the economic new normal and middle-income phase. The five major development concepts have become the strategic thinking enabling China to stride to a high-income stage during the 13th and 14th Five-Year Plans.

Additionally, China has persistently endeavored to improve people’s livelihoods in order to realize the goal of a shared development—this is the essential requirement of socialism and an important reflection of its superiority. Up to now, China has steadily built a public services system that is suitable to national conditions, fairly complete, with coverage of both urban and rural areas, and sustainable. It includes the six key areas of employment services, mandatory education, public health and basic medical care, cultural services, basic social security and social housing. These go to the root of the wellbeing of citizens, and embody the superiority of a socialist system.

Take the prevalence of the New Rural Co-operative Medical Care System as an example. China began pilot schemes in 2002; by 2005, it had 75.7% coverage and reached 98.9% by 2014, which is practically full coverage.³⁰ The Urban Resident Basic Medical Insurance scheme was launched in 2007. The number of urban residents enrolled started out at 42.91 million people in 2007, and shot up to 377 million people in 2015. At the end of 2015, 660 million urban residents and workers had basic medical insurance coverage, accounting for 85.7% of the urban population.

Turning to basic pension insurance: China launched the NewRuralSocialEndowmentInsurance System in 2009, and the SocialEndowmentInsuranceSystemforUrban Residents in 2012. Together with the Basic Endowment Insurance System for Urban Workers, these provide coverage for all groups. The number of urban residents enrolled under the insurance scheme increased from 103 million in 2010 to 505 million in 2015; combined with urban workers enrolled under the insurance scheme, the total number increased from 360 million people in 2010 to 858 million in 2015. The number of people with pension insurance account for 85.5% of the population over 15 years of age. We project that by 2020, China will have realized universal medical care and pension insurance.

Altogether, Chinese government has taken active measures to reduce poverty, build a public services system accessible to all and drive inclusive development that embodies shared development with Chinese characteristics. The five major development concepts raised at the Fifth Plenary Session of the 18th CPC Central Committee make specific mention of shared development, which makes advancing social justice and equality its premise, with eradicating poverty, reducing the income gap, providing equal basic public services in both urban and rural areas as a means to shared prosperity as its objective. The shared development model is an important reflection of China’s improvements in governance capability, and will remain a core tenet to China’s long-term development. This will also be the foundation for a stable social and political environment, and provide a systematic guarantee for China’s successful leap from an upper-middle income to high-income country.

3.2.8 Summary

To conclude, even though China is currently in the upper-middle income stage, and its economy is facing challenges of economic transformation, ecological and environmental burdens, an aging population, income disparity, social and political stability concerns, among others—it is also taking active measures to address these issues. For example, China is actively facilitating the transformation of its economic growth model, curbing ecological and environmental deterioration, narrowing income disparity and addressing factors causing social instability. The challenges presented by an aging population can be mitigated by the accumulation of “education dividend”. Though threats to political stability could bear a long-term presence (particularly from externally), China’s continued progress in political development and governance capability can still safeguard stability. Therefore, these impediments are unlikely to trip China into the “middle income trap”. Besides, the country is armed with several favorable conditions to lift it over the “middle income trap”. These include ever-improving strategic planning capability, steady economic structural transition and ever-maturing macroeconomic management. China is equipped with the fundamentals for sustainable growth; moreover, it has the benefits of the socialist system as the political safety net against the trap.

China will not retrace the steps of the Latin American, former Soviet and eastern European countries in stumbling into the “middle income trap”, nor will it spiral into long-term stagnation. The key to guaranteeing this is to discover in time the primary factors that could push the country into the “middle income trap”, accurately identify and adeptly avoid the “trap” and, all the while, readily take advantage of the favorable development conditions to propel the country right over it.