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China in Transition

China’s rising middle class will challenge the world’s resources — and press China’s leadership for change, says Cheng Li, a leading Chinese political scientist.

China’s burgeoning middle class has been a powerful source of political, social, and economic stability, and its growing demand has provided a foundation for the country’s transformation from an export-driven economy to one that is led by consumption. But pressures on the Chinese middle class are increasing as well: Inflation is rising, a property bubble keeps young families from buying real estate, and a large number of college graduates are unable to find jobs.

All this is putting enormous pressure on China’s leadership, says Cheng Li, a political scientist from Shanghai who is director of research at the Brookings Institution’s John L. Thornton China Center. In China’s Emerging Middle Class: Beyond Economic Transformation (Brookings Institution Press, 2010), Li argues that what affects the Chinese middle class challenges not only China’s leaders, but also the future of the entire world. Li was in New York in May to speak at a conference organized by the Committee of 100, a nonprofit focusing on U.S.-China relations. In a follow-up discussion with strategy+business, he described the global implications of a strengthened Chinese middle class and the potential for change as it continues to grow and seek greater reform.

S+B: Can the world’s resources handle 1.3 billion increasingly active Chinese consumers?
LI: The rise of the Chinese middle class is a mixed blessing. As China transitions from an export-led economy to a consumption-led economy, the global environmental and ecological implications will be overwhelming. But I think the Chinese government should avoid [encouraging] today’s progress at tomorrow’s expense. For example, if China continues to adopt a model in which every family owns a car, it would be a huge [environmental and infrastructure] disaster for the country, with repercussions for already strained resources that could be felt around the world.

At the same time, in the transition to a domestic demand–driven economy, the middle class is essential: their consumption, their need for a service sector. This is what made the United States such a strong economy. It is a necessity for further growth. So it’s really a paradox in many ways. We should avoid the [highly polluting] 19th-century or early-20th-century model of economic growth, and we should be environmentally and ecologically sensitive. Meanwhile, domestic demand is part of the solution for stimulating the economy in China, and will also create a more balanced U.S.–China trade relationship. India and Indonesia will face similar challenges. In fact, of the world’s five largest middle-class markets, four will be in Asia by 2035: India, China, Japan, and Indonesia.

We should also put this transition in perspective. With or without the rise of the middle class, China faces serious demographic challenges, namely, urbanization, or internal migration. According to various studies by Chinese and foreign experts, between today and 2025, about 250 million Chinese will move from rural areas to urban areas, and already about 200 million people have moved during the past two or three decades. This is the largest migration and urbanization process in human history. If a person moves from a rural area to an urban area, that person’s need for water will increase by 28 times, largely just because of taking showers. China already has a water shortage; how could it afford that?

S+B: What are the primary challenges affecting the middle class?
LI: China faces several serious economic challenges, such as inflation and major structural changes in the economy. Another is the property bubble. Chinese government statistics say that 86 percent of the middle class own housing units, but that’s misleading because it refers to current families. For new families — recent college graduates and other young workers — it’s very difficult. In major cities, mathematically it’s incredible; real estate is more expensive than in San Francisco or Hawaii, but Chinese income is low. People in China joke that they had to start saving to buy a home in the Tang Dynasty.

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