Challenges for China’s new Premier by Tim Cullen (2013)

In mid-March (2013), new leaders of two of the world’s largest communities assumed power. The two events have some common features and many differences.

China’s New Premier Faces Domestic and International Challenges
By Tim Cullen

Hong Kong International Economic Herald
8 April 2013

In mid-March, new leaders of two of the world’s largest communities assumed power. The two events have some common features and many differences.

On March 13, in Rome, the white smoke from the Sistine Chapel in the Vatican signaled the choice of a new Pope to lead the world’s 1.2 billion Catholics.

The next day in Beijing, Xi Jinping was elected President of the People’s Republic of China, and the following day Li Keqiang became the new Premier – the new leaders of 1.3 billion Chinese citizens.

Beyond the coincidence of the timing and the similar number of people who will look to the Pope and the Chinese President for leadership, there are some other comparisons that are of interest. Xi and Li are among China’s youngest leaders in recent years, while Pope Francis is one of the oldest men to become Pope in the history of the church. In both cases, the people they will lead and the others – non-Chinese and non-Catholics alike — are speculating about what they will do differently from their predecessors. In both Rome and Beijing, the new leaders will have to balance strict adherence to doctrine (Catholic and Communist) with the need for reform that is appropriate to today’s challenges and will meet the demands of the people whose lives their decisions affect.

After a series of scandals, the reputation of the Catholic Church is in tatters and many observers see a battle between conservatives and reformers on the future direction of the Church. While the Pope must focus on what directly affects 1.2 billion Catholics, he also has to be conscious of the impact of his decisions and the Church’s policies on the governments of the 200 countries where Catholicism is practiced.

The new Chinese leadership has a more homogenous body of 1.3 billion people who look to them for leadership than does the Vatican. They are all Chinese, albeit with different ethnic origins. The ability of the Chinese government to affect the lives of the populations in multiple ways is much greater than that of the leadership of the Catholic Church and decisions taken in Beijing have the potential to impact the rest of the World much more than what happens at the Vatican in Rome.

Against this background, where both the Chinese leaders and the new Pope sought first to encourage and reassure their own people – and then, the rest of the world — in their initial statements, there was a remarkable thematic similarity. The Pope made it clear that his priority was the poor of the world. In his first major statement,
Pope Francis urged Catholics to shun corruption and greed and reach out to “the humble, the poor, the forgotten.”

Compare, the first comments, in his role as Premier, from Li Keqiang, who is the focus of this article. He noted that improving social fairness in China was of key importance and he cited the need to close the gap between the incomes and quality of life of rural dwellers and their urban counterparts. He also said at his first news conference in the Great Hall of the People: “Corruption and the reputation of our government are as incompatible as fire and water.”

Observers from outside the natural constituencies of both these new leaders will be encouraged by the emphasis on the lives of ordinary people and the commitment to fight corruption – both of critical importance to leaders who need to implement reforms.

Let us turn the spotlight explicitly on Premier Li Keqiang. What is the world looking for from him and what can we expect?

Premier Li’s reference to the reputation of government is instructive. Internationally, China’s reputation does not match the reality of a country that has a great history, a very clever and industrious population, and a pace of economic growth, which is the envy of almost every other country in the world. In the most recent rankings of countries by reputation, the Country Brand Index places China in 66th position out of
118 countries that were assessed. The Reputation Institute’s 2012 ranking of a smaller number of countries, places China at number 43 – down from 33 in 2009.

The Reputation Institute also compares how the people within countries see themselves (Self-Image) and how people in other countries perceive them (External Perception). China (along with Turkey and Colombia) shows the biggest discrepancy of all countries in the world, meaning that the Chinese people think their reputation is better than it really is. Premier Li will be aware of the challenge he and his colleagues face in turning this around.

In 2008, the Commission on Growth and Development highlighted China’s great success in sustaining economic growth in excess of 7 percent every year for more than 25 years, and at 8.3 percent for the ten preceding years – far ahead of any other country. In assessing why some countries grow faster than others, they highlighted five characteristics, all of which applied to China. These were:

  • They fully exploited the world economy
  • They maintained macroeconomic stability
  • They mustered high rates of saving and investment
  • They let markets allocate resources
  • They had committed, credible, and capable governments

China is famous for its exceptionally high rate of domestic savings. The Growth Commission attributed this willingness by the Chinese people to forego consumption today in order to fulfill the hope of a better life for their children to the population’s trust in the government and their belief that the government genuinely has their interests at heart and wants to lift people out of poverty. Premier Li’s promises to stop spending on government offices, freeze spending on official vehicles and on overseas travel by government officials, represent an acknowledgement that this trust cannot be maintained if government officials are seen to be living in luxury while ordinary people are without many essentials of life. “Reforming is about curbing government power,” he said. “It is a self-imposed revolution that will require real sacrifice and it will be painful.”

Experience in recent years has shown the Chinese government that ordinary people in China are communicating with each other like never before, and one way or another they find out if government officials misbehave or are self-indulgently living a life of luxury. More than 75 percent of the people in China have mobile phones, so they talk a lot, and social media like Weibo and Renren mean that information moves around this vast country very quickly, despite the government’s control of news media. It is also worth noting that many of China’s government-controlled newspapers have investigative reporters whose editors allow them to uncover and write about corrupt behavior in state-owned institutions.

In a society that technology has made more open, government at all levels has to be more accountable to the people if that belief that the government and the Party is looking after them, that served China so well for so long, is to be maintained. So, Li’s commitment to tackle bureaucracy and corruption is, surely, a necessity rather than a rhetorical sound bite.

To perpetuate the people’s confidence that the government cares about their welfare, the government must ensure that economic growth is maintained and that the Chinese people can enjoy the fruits of the growth to which they contribute by their labour. President Xi has talked about basing future growth more on domestic demand and consumption and less on manufacturing for export.

It must be remembered that no country has been successful in lifting people out of poverty in the absence of growth. China is the great proof of this, with hundreds of millions of people benefiting from the country’s decades-long growth even if the ‘Gini Coefficient’ for China – the measurement of the gap between rich and poor – has been deteriorating. This gap inevitably causes resentment, even for people who have seen their incomes grow rapidly. They still don’t like seeing conspicuous consumption by people who have been able to benefit more than they can.

Li has laid out a vision that calls for ensuring growth – of at least 7.5 percent annually — as the path to prosperity, but that also makes China a healthy and equitable place to live.

There are three overlapping elements to this vision:

  • Protecting the environment, curbing pollution and addressing problems of product and food safety,
  • Focusing on urbanization as a positive challenge rather than as a necessary evil which has to be controlled, and
  • Reforming China’s national healthcare as the key element of an improved social safety net.

Is the new Premier raising expectations that may be very difficult to meet? What lessons can China learn, both from its own past experiences and from what has happened in these difficult policy areas in other countries?

At his first news conference on March 17, Li acknowledged the challenge: “In pursuing reform, we have to navigate uncharted waters. We may have to confront protracted problems, because we will have to shake up vested interests,” he said. “Sometimes stirring vested interests may be more difficult than stirring the soul. But, however deep the water may be, we wade into the water because we have no alternative. Reform concerns the destiny of our nation.”

The Premier’s choice of metaphor recalls Deng Xiaoping’s well-known dictum: “Crossing the river by feeling for stones.” His words suggest a possibly more rapid pace than the cautious approach recommended by Deng.

Sadly, many of the rivers of Deng’s youth, are now terribly polluted. The River Health Index (RHI) is a measure developed by the International Water Centre in Brisbane, Australia to compare river basins and also to track progress in improving environmental water security. According to this new measure, China ranks as 31st out of the 59 Asian countries assessed. Excessive use of water resources is the main contributory factor to this low ranking. High population density, excessive water withdrawals by farmers, and mistreatment of rivers in urban areas by factories as well as by individuals, all contribute to the problem.

International water experts have been impressed by new policy tools that the Chinese government is exploring to address upstream/downstream trade-offs – an issue common to many countries and regions of the world. Under a new “eco- compensation” approach, the downstream local government pays an upstream government and communities for environmental services provided by the upstream watershed. In other words, the incentive structure is turned around from the well- known “Polluter Pays” principle to become the “Beneficiary Pays” principle.

Premier Li expressed his concern about poverty and the threats to rivers eloquently when he said “Poverty and backwardness in the midst of clear waters and verdant mountains is no good. Nor is it [good] to have prosperity and wealth while the environment deteriorates.”

In recent years the Chinese government has made great strides in seeking solutions to environmental challenges, which, in a country as vast as China, range from water resources, to deforestation, to desertification, to climate change, to pollution, to energy efficiency, to threats to biodiversity. While environmental regulations have been strengthened, subsidies have been withdrawn from some polluting industries, and some polluting industries have been closed down, targets have often been missed.

There is still a great deal to be done and part of the problem is that corruption has often prevented enforcement of new rules. While the central government in Beijing, issues tough regulations, monitoring and enforcement is largely the responsibility of local governments, to whom growth at any cost is sometimes the mantra. Li spoke
with emotion when he said that he was upset by Beijing’s smog; “To tackle the problems, we need an iron fist, firm resolution, and tough measures.”

It is encouraging that Premier Li has highlighted environmental protection and improvement as a priority. This also dovetails very well with his oft-cited commitment to urbanization. In his March 17 news conference he said: ”We need to prevent urban malaise and avoid the situation in which high-rises co-exist with shantytowns.”

China’s urban population is projected to grow by about 250 million people over the next 12 years and by the same date, 202 Chinese cities will have populations with more than one million residents. Over the same period it is estimated that 90 percent of China’s GDP will be generated by cities, compared to 80 percent today.

The movement from the countryside to China’s cities has been described as one of the most significant migrations in history. Consistent with the views he has expressed about equitable economic growth and on environmental issues, it is little surprise that Li has better urbanization policies high on his list of priorities.

The massive migration to the cities is putting exceptional pressure on their ability to offer a decent quality of life to their residents. One of the big questions is the extent to which the new leadership in Beijing will be willing or able to make changes to the hukou system of household registration. Under this system, most rural people who move to the cities cannot become official urban residents, meaning that they cannot have access to benefits like health care and education. Clearly it is unsatisfactory to have large numbers of “second class citizens” in China’s cities, but Party leaders have always worried that relaxing the hukou rules runs the risk of turning the wave of migrants to the cities into a tsunami.

Rather than looking at urbanization purely as a problem, early indications are that Premier Li wants to approach the issue positively in a quest to improve urban planning. One must hope that lessons can be learned from the disorderly city growth of the past and, beyond simply improving water and sanitation, public transit, and the other things that can make a city livable, the approach can creatively capture the best ideas from urban planners from throughout the world. There is much that can result from the signals emanating from Beijing, but city mayors can benefit greatly from dialogue with their counterparts in other parts of the world where solutions have been found through research and the trial and error of applying what the research recommends.

Another priority area that Li has highlighted is the need to accelerate reforms in the health sector. The Health Care System Reform, launched in 2009, called for a socialist healthcare system, which would extend coverage to 90 percent of the population by the end of 2012. The question still remains as to the quality of the healthcare provided. At slightly over 5 percent of GDP, China’s total healthcare expenditure is well below the average for all middle income countries (6.6 percent). Plans to extend free or low-cost healthcare to 100 percent of the population by 2020 is an admirable goal but may be difficult to achieve.

Last year, as Vice-Premier, Li stressed the need to establish a system of insurance for people with serious acute or chronic diseases, noting the financial burden on the families of such patients. Surgeons in hospitals in the United Kingdom, where the National Health Service (NHS) was established 15 months before the People’s Republic of China, used to be quoted as saying that, when they had to tell a family that a loved one must undergo surgery and painful treatment, it was a relief to know that the family didn’t also have worry about whether they could afford to pay for it. When the UK’s NHS was set up, it had three core principles, which have guided it over the past 65 years:

  • It must meet the needs of everyone
  • It must be free at the point of delivery
  • It must be based on clinical need, not ability to pay

Over the years, the system has undergone many changes, but remains a central part of English life, as the Opening Ceremony of the 2012 London Olympics demonstrated. Two of every 100 people living in England are employed by the NHS, making it the world’s fifth largest employer, after China’s PLA, Indian Railways, the US supermarket chain, Walmart, and the US Department of Defense.

The cost of running the NHS comes directly from taxes and its budget is roughly equivalent to GB £2,000 (about HK $23,000) for every man, woman, and child in England, which is more than many people in China earn in a year. So free comprehensive health care is very costly. The NHS sits along a private system of health care insurance, which is bought by the wealthy or by companies for their employees. While charges for prescriptions for medicine are GB£ 7.65 (HK$90) as one of a number of ways in which the NHS offsets some costs, many people from children to pensioners, to pregnant women, are exempt.

While English people are generally happy with the treatment they receive, it is a popular pastime to criticize the NHS. If China embarks on a similarly massive effort to provide high quality health care for all, it would do well to look at the experiences of the English system. After 65 years, the British government is still trying to figure out how to make it work better and be cost-effective. They can surely share some of these lessons with the Chinese government. The latter only needs to look to the United States, to see how much controversy introducing universal health care in a very large country can create.

One, seemingly easy intervention that can have a positive impact on health in China is in the area of food standards. Li recently said: “Food safety is of utmost importance as it pertains to people’s quality of life and health. This government will take measures to punish heartless producers of sub-standard and fake food.”

One consumable, which adds greatly to China’s health problems and causes a strain on healthcare resources, is tobacco. With tobacco production being a government monopoly and tobacco taxes accounting for 7.5 percent of government revenues, curbing smoking would not be universally popular!

As was noted earlier, China’s reputation is not as good as the reality of what the country is really like. While Li Keqiang’s priority will be to initiate reforms to improve the lives of Chinese people and he will be concerned about the reputation of the Government and the party among domestic constituencies, he will doubtless also be looking for ways to bolster China’s international reputation.

The latter may be achieved in areas where the rest of the world looks to China for leadership. These include: Lessening of tensions on the Korean Peninsular; using its good offices to facilitate progress in trouble spots in Africa like Sudan and Zimbabwe; using its vote constructively in the UN Security Council; and in a number of other ways.

China’s domestic policies are scrutinized by the international community and actions resulting from Li’s first statements as Premier, including his commitment to ensure the rule of law will be followed closely to see whether his admirable rhetoric can be converted into implementable reality.

Tim Cullen is an Associate Fellow of the Said Business School at the University of Oxford and a commentator on international economic issues. This is a translation of an article he wrote for Hong Kong International Economic Herald, which was originally published in Chinese.

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