Why China won’t reach their “moderately prosperous society” goal this year.

2020 was to be China’s year.

They would fulfill the goal of transforming into a “moderately prosperous society”. By the end of the year, China’s GDP and disposable income were to double that of 2010’s. No citizen would be living under the national poverty line of 2,300 yuan (~$325) at 2010 prices either.

Then came Covid-19.

The pandemic paralysed economies across the world. China was not shielded from its effects either. The challenges faced in the 1st quarter has spilled over into a subdued outlook for the rest of the year. The ongoing uncertainty provides a steep challenge to achieve a strong economic recovery. Will China be able to deliver a Xiaokang society in the face of the virus?

Journey to Modernisation

The roots of Xiaokang traces back to 2,500 years ago. It stemmed from people of ancient China longing for a happy and peaceful life. The concept has evolved with the modernisation of the country. It was with Deng Xiaoping’s influence that the idea of a Xiaokang society became a core part of Chinese politics.

Deng Xiaoping had a simple policy goal in 1980 — quadruple China’s GDP, and GDP in real terms from 1980–2020. The goal was then linked to the concept of “Xiaokang Shehui” which he introduced to the Chinese political discourse. Under his leadership, China’s economy grew from strength to strength. In 1997, the goal was achieved way ahead of the stipulated timeline.

China’s various leaders continued to invoke this concept in political plans. The last 40 years has been one of the most critical stages of the concept’s integration into modern Chinese society. It currently assumes a vital role under Xi Jinping’s presidency. One of his political goals is to “comprehensively build a moderately prosperous society in all respects”.

The goal of achieving Xiaokang is tied to real policy objectives. We’re nearing the end of the Chinese Communist Party’s (CCP) 13th 5-year plan (2015–2020). 3 core focuses of the plan are doubling of the country’s GDP, and disposable income from 2010–2020, and a nationwide campaign to eradicate poverty.

China’s goal is to achieve Xiaokang by the end of 2020. This ties in with CCP’s celebration of its 100th birthday in 2021. Will this year prove to be a triumphant year for China? I break down some reasons why the journey looks like it will take a little longer than planned.

No more relentless economic growth

For China to double its GDP from 2010 to stay on track, economic recovery for the rest of 2020 would need to be strong. Pre-pandemic, the expectation was 6% growth. In Q1, China’s economic growth shrank 6.8% instead, and is their first contraction since 1992. This past May, Premier Li Keqiang announced that China will not have a GDP growth target for the year. This is also the first time in decades a decision like this has been made.

Data released in June seem positive. Services PMI numbers for the month are at 10-year highs. Manufacturing PMI also exceeded expected values. Both numbers were above 50 indicating an expansion.

Deep diving into the data belies a longer-term rosy outlook. Recovery in manufacturing demand doesn’t equate improved overseas demand. Consumption has always been the main driving force of China’s economic development. On average, domestic consumption accounts for 55% of China’s GDP. Retail sales, including spending by governments fell 2.8% YoY. Exports have also come off their lows. My argument lies with the sustainability of export numbers. Sales of masks, medical equipment, and anti-pandemic materials are buoying export numbers. How much more can this contribute to export growth for the country?

Unemployment measurement

Accurate? Hard to say.

The country’s reported rate of unemployment has always been stable. Some research into the numbers presented some flaws in their model.

First, surveys done to gauge the unemployment rate only cover urban areas. This leaves a large part of the country unaccounted for given that 40% of the population are in the rurals. Based on the legacy of China’s land tenure system, rural residents receive government-owned land to till. This classifies them as state employees. Rural residents who move to work in urban areas choose to maintain their provincial land ownership. Hence, to avoid double counting, official statistics exclude rural employment numbers.

Second, there are arguments against the figures of the migrant worker population. Experts say they are either undercounted or exempted altogether. The imbalance arises due to China’s unique household registration system, or hukou. The system, implemented in the 1950s, is used as a means to control the movement of the population. The control makes it tough for migrants to get urban resident status. Ergo, many folks maintain their rural status. It has in modern years created consequences of the large rural-urban divide.

The pandemic’s shock has also put more pressure on unemployment numbers. At its peak, unemployment was at 6.2%. Unfortunately, migrant workers are most susceptible to the effects of the pandemic. Referred to as the “floating population”, they often work odd jobs to make ends meet. They move around cities as unregistered workers — street vendors, wait staff. This makes it difficult to determine accurate employment numbers.

Image source : http://content.time.com/time/world/article/0,8599,1868667,00.html — Migrant workers carrying their belongings as they head home after failing to find jobs in Nanjing.

Poverty alleviation through disposable incomes

Poverty elimination is one of the government’s hardest tasks. Statistics show that the number of people living under the national poverty line has fallen to 5.51m. This is down from 100m reported in late 2012. That said, the standard for absolute poverty is the same for both the urban and rural areas. This is despite the higher living costs in urban areas.

The low benchmark for recognising poverty allows for the rate of poverty to be close to none in big cities. For many daily wage workers in the urban area, staying above the poverty line is an ongoing challenge. The widening income gap compounded by the rising cost of living are putting more people below the poverty line in urban areas.

The past few years have been Beijing’s largest poverty alleviation campaign. General numbers reported are a great sign of the significant progress made in the last 4 decades. As of May 2020, the number of poverty stricken counties fell from 832 to 52.

Image source : CGTN

One initiative was the “pairing up strategy”. This covers 30 impoverished provinces in the western side of China. The provinces received help from more developed provinces in the east. Each impoverished household had officials assigned to them. The large amount of manpower devoted reflects Beijing’s dedication toward the campaign.

China’s internet giants were also roped in by President Xi. Dubbed the “Internet Plus” strategy. Alibaba is part of the creation of “Taobao villages”. These are rural e-commerce centres. The goal is to encourage online sales of agricultural and local provincial specialties. Household income in Taobao villages are now 3x that of the average rural household in China.

The spread of e-commerce has helped to support the development of the provinces. Since 2014, the growth of active online shops has grown 10x. The widening market access has allowed rural business owners to reach far across the country.

Image source : World Bank

The e-commerce market in China recorded a volume of US$1.9 trillion in 2019. One spillover effect of this is a 5.8% YoY increase to 30,744 yuan (~US$4,400) in the disposable income of the nation. Yet the wealth disparity between the urban and rural areas still remains high. Separately, urban and rural disposable income per capita was 42,359 yuan and 16,021 yuan.

As Utopia beckons, Beijing will ramp up efforts as they remain conscious of their target date. Bureaucrats will start to feel the pressure to achieve goals related to Xiaokang.

The road to more sustainable and sound numbers looks to be a longer-term game at this juncture. As they rush to meet targets, China will ultimately find a way to declare victory. The fruits of development must be shared by all. Yet for many citizens who are yet to feel prosperous, the reality of Xiaokang looks to still be a distant journey ahead.