It was March 2007, China's legislature was wrapping up its annual session and Premier Wen Jiabao was about to speak at the closing press conference. The economy was seeing double-digit growth, a consumer class was rising and Beijing was soon hosting its first Olympics — there was every reason for a savvy politician to boast.
But that's not what the Chinese premier did.
"There are structural problems," Wen said ominously into a microphone, "which are causing unsteady, unbalanced, uncoordinated and unsustainable development."
"It was a shocking speech at the time," says Peking University economist Michael Pettis.
Shocking because by 2007, many of the world's top economists, turned off by the growing financial crisis in the United States, were falling in love with China's economic growth model.
"Most economists insisted that the Chinese growth model was perfectly fine, there were no problems with it, it was the best thing since sliced bread," remembers Pettis. "So when Wen Jiabao announced that imbalances were very deep and had become a problem for China, that obviously resolved the debate very, very quickly."
Fast-forward to this month: China's government has made the controversial move to abolish presidential term limits. While that's dismayed outside observers who hoped the country would become more liberal, there is a flip side to the debate. According to some economics experts, this critical reform could give President Xi Jinping time he needs to correct the problems Premier Wen was warning about — and that could actually turn out to be a good thing for the global economy.
Lopsided growth
China has spent the better part of the last two decades on a building spree. It's constructed the world's largest high-speed rail network, dozens of subway systems, highways and entire cities. This investment-led model has driven a historic economic expansion, but it's also resulted in a dangerously lopsided economy. The growth has disproportionately benefited the elite in and around the government instead of everyday Chinese workers, many of whom still don't make enough to enter the consumer class.
President Xi's administration spent much of its first term attempting to rebalance the economy toward a more sustainable, consumer-led growth model. But according to China's top economic experts, doing so will likely cause economic pain to the country's powerful state sector, and it will take several years. That's why economists like Pettis reason that eliminating term limits for Xi might be better for China's — and the world's — economy in the long run.
Despite former Premier Wen's warnings, imbalances in the national economy grew. China's leadership in the early 2000s under then-President Hu Jintao tried to introduce reforms to restore balance, but they gave up when the rich and powerful pushed back, protecting their massive share of China's economic pie. "In the end they decided simply to keep the ball rolling, since they only had two or three or four more years in office," recalls Pettis.
Politically, it was the choice of least resistance. Economically, analysts say it led to wasteful spending, dangerous levels of government debt and rampant corruption; all issues that have confronted President Xi since he took office in 2013.
There are many reasons behind the Chinese government's controversial scrapping of term limits. They include bringing the president role more in line with two other top posts: the military and Communist Party heads.
But in terms of economics, the reforms China needs, Pettis says, will require strong leadership over an extended period. Xi has used his first term to consolidate power — now he's been given more time to wield it.
"My big fear if he didn't have a third term is that he would be really reluctant to implement the reforms during this term because there's almost no way you can do so without slowing the economy for many, many years," Pettis says of the economic reforms needed to restore balance to China's economy. "So there's no way he could've really reformed sufficiently without leaving 2022 in a pretty bad state."
And that, says Pettis, would have likely spelled political trouble for Xi at the end of his second five-year term.
China should be greater
For visitors to China's gleaming cities of Shanghai and Beijing, the trajectory of the national economy may seem unstoppable — but appearances are deceiving. "China's economy is so far below its potential," says Shanghai-based economist Andy Xie. "China should be, by far, the largest economy in the world."
Xie points out that 800 million Chinese people work, most of that population works overtime, and nearly 70 percent of Chinese women work — outperforming men in many developed countries.
In other words, China's population works incredibly hard.
If you set the direction right, China will boom beyond your imagination.
Yet the nation's gross domestic product per capita hovers just above $8,000 a year — below the global average and about a fifth of the average developed country. Xie says systemic corruption has siphoned much of China's economic spoils over the past 20 years into the pockets of corrupt government officials. Xi has devoted his first few years as president to cleaning up political corruption, and now he needs to pivot to focus on lifting household incomes, says Xie.
China's labor force remains productive. "In a way, the government in China has a very good hand," Xie says. "If you set the direction right, China will boom beyond your imagination."
But will Xi — now a potential ruler for life — set China's economic direction straight? "In the short run, absolute centralized power might help continue economic growth and make it easier to make political and economic decisions," says Shi Yinhong, an international relations professor at Renmin University in Beijing. "On the other hand, a flexible political environment and civil liberties are needed in order to have a sustainable and healthy economy."
And most observers agree that, with the government's near-unanimous approval of doing away with presidential term limits, a flexible political environment is something China will lack for some time to come.
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