Comment: China - the world's economic adolescent

Shanghai skyline. Photo Kenny Rodger.

Opinion

Did you know that retail invoices in China double as instant scratchies?

For a Chinese business invoice to be tax deductible it must be printed on a government authorised receipt called a fapiao. Historically, retailers failed to issue fapiao to customers because they avoided sales tax collection that way.

To deal with this, in 2002 the Chinese government introduced a series of retail fapiao where instant prizes could be won by scratching a 'prize area'. Banking on the Chinese love of gambling, the Government innovatively incentivised the public to demand official tax invoices.

Only in China does the Government have the power and desire to control all business invoices. To Western observers, the fapiao solution seems as clever as it is clumsy. It's an example of the compliance challenges facing China as it surges towards economic maturity.

Despite galloping growth, China the economic adolescent grapples with endemic official corruption, unreliable statistical reporting and a significant double entry bookkeeping problem in accounting practices.

Business is further compromised by awkwardly entwined political and commercial motives. The recent high profile Stern Hu matter between China and Australia demonstrated China's political inelegance when its commercial intentions are frustrated.

Following its snubbing in a major deal with Rio Tinto, China arrested Hu on dubious bribery and spying charges. In doing so it looked petulant and heavy handed. Just like a moody teenager but with serious international consequences.

China has all the advantages of a maturing economy, but also the disadvantages. The pace of development is breathtaking. The government is now committed to overtaking the United States in nuclear, wind and solar power and energy efficiency. These goals are now achievable but the initiatives demand enormous investment in infrastructure which needs to be balanced against social progress.

Economies with relatively sophisticated health, education and social services infrastructures such as the United States and New Zealand face the challenges that come with the privilege of economic maturity.

They are obligated to balance sustainable economic growth and international competitiveness against (relatively) high labour costs, increasingly expensive ageing populations and expectations of access to superior healthcare, welfare and education. Their publics are generally resistant to higher income taxation.

Many economists predict growth rates in developed countries to be steady but low in the post-GFC world. Bill Gross, CEO of PIMCO, the world's largest bond fund, consistently reinforces the message this is an era of 'deleveraging, deglobalisation and re-regulation' - trends which will inevitably slow the pace of growth.

In contrast, China's growth is consistently strong but its greatest challenges for the medium term may be domestic issues of wealth disparity, inadequate social service infrastructures and the rise and increasing influence of a prosperous Chinese middle class.

Healthcare is a good example. While the USA is currently electrified by debate over the future of health care the central issues are financial incentives and coverage systems. By contrast, the Chinese health system is under resourced and disparities widen as China seeks to sustain economic growth.

Many Chinese hospitals have V.I.P. wards called gaogan bingfang which Kiwis would find unpalatable at home. The World Health Organisation reports that urban healthcare standards are improving but the cost to China of bridging that 'quality gap' to parity with western countries is phenomenal.

There is no evidence the people of China have any fewer quality of life aspirations than people in mature economies. The government has a stated goal of social harmony and stability but it must deliver more than rhetoric. As a prosperous Chinese middle class grows they will gradually find a voice the government cannot ignore.

As they become able to afford quality healthcare and education, wealthy Chinese will have commensurate expectations about provision of services. It stands to reason. What use is it to be a success in the world's economic powerhouse if you cannot enjoy the access to superior healthcare and education that ought to come with it?

How the Chinese Communist Party deals with the expectations of an emergent middle class may define its hold on power. Just as in the Soviet Union, a threat to political dominance is whether these new classes consider the one party state serves them best. The vestiges of power do not guarantee longevity.

At their demise, most eastern European socialist governments still had ostensible control of economic regulation and policy, oppressive internal security networks as well as sway over the armed forces. None of this mattered. Decades before they collapsed, the communist powers of eastern Europe change their focus from ideology to preserving their hegemony at all costs.

The GFC has given China new prominence as America's banker. If the 'Chimerica' theory advanced by Niall Ferguson and Mortiz Schlarick is now a reality, then the strategic relationship between these powers is the ascendant geopolitical question of the future.

China has become the second most important global power with GDP 70 times bigger than when Deng Xiaoping endorsed free market policies in 1978.

But in its recent occasional paper entitled 'The Geopolitical Consequences of the World Economic Recession - A Caution' the Rand Corporation observes that in 2007 (the latest year for which data is available) "China's gross domestic product (GDP) in constant 2000 US dollars was 21 per cent of US GDP; in current dollars it was 23 per cent." For the time being, the US is still the 'adult' in their relationship.

China the adolescent must prepare to deal responsively with the likelihood of an aspirational emerging middle class. Part of the transition through to maturity must involve building a sophisticated and necessarily expensive social infrastructure that caters to their growing needs. This means some growing pains along the way.

Simon Arcus is a lawyer who has lived in Sydney and Auckland