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Why China is worse off than it was a decade ago

by Derek Scissors and Dean Cheng

Hu Jintao, Wu Bangguo and Wen Jiabao will step down from the top of the Chinese Communist Party this week. Four months later, or thereabouts, they will surrender their (less important) places at the top of the Chinese government.

And not a moment too soon. Their decade leading the People's Republic of China should be viewed largely as one of lost opportunities, even failure. Bad decisions made early put China in its current, unnecessarily weak position—a position that will not improve for the next several years.

Hu and friends will be remembered for transitioning China from a regional to a global power. But they actually deserve little credit for that; it was going to happen no matter who was at the helm of the country.

China is in many ways worse off today than it was in 2002, when the last leadership transition happened. PIB

China in 2002 – its last political transition – was already a member of the UN Security Council and the WTO, was already second in global GDP corrected for purchasing power, beginning to modernise its military, and a diplomatic heavyweight in the Asia-Pacific. And the trend looked very positive on all fronts, as it had for the previous 20 years or so.

Now the PRC is second in global GDP on conventional measures, its military modernisation has reached new heights, and it is a diplomatic heavyweight globally. This is not at all surprising.

What is surprising is that, in important ways, China is worse off than it was in 2002. Back then, it was seen as a desirable economic partner, not as a dangerous political or military neighbor. States vied to establish economic ties with the panda, while not fearing that there would be bared dragon’s claws or teeth.

Hu, Wu and Wen cost China dearly in the economic realm. In 2002, China boasted sustainable growth above 8 percent. Investment and consumption were balanced, so continued growth did not require a wrenching change in the development model. Income equalities at least appeared quite manageable. The banking system had been strengthened throughout the previous five years. Coal consumption was barely higher than 1998, for example, and the same for many other natural resources.

In 2012, Chinese GDP growth will be lower than it was in 2002, which is perhaps unavoidable. But that’s not the problem.

The problem is the economy is now massively unbalanced and will require painful rebalancing to continue to prosper, a shift that should not be necessary. The problem is that income inequality, especially in the form of extreme wealth for top Party cadre and their families, has become politically and socially destabilising. The problem is that progress in banking was undone by the 2009 lending splurge. The problem is that coal, water, and other resources have been used in gigantic and wasteful amounts that made only minor contributions to growth. All this is due in large part to the policies of the Hu regime.

In the security realm, China’s foreign policy position is arguably also weaker, as its neighbors take measures to balance against it. From South Korea and Japan, along the entire first island chain, and westwards to India, China is increasingly seen as an antagonist and potential adversary, even as states continue to trade with it. In particular, recent riots against Japanese ventures, as well as the 2010 rare earths embargo and this year’s decision to downgrade participation in an IMF meeting (held in Japan),raise questions about China’s reliability as an economic, as well as diplomatic, partner.

This is the legacy of Hu, Wu and Wen: a weaker economy and unhappier neighbours.

Derek Scissors is Senior Research Fellow in Asia Economic Policy and Dean Cheng is Research Fellow in Chinese Political and Security Affairs in the Asian Studies Center at The Heritage Foundation.