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How China’s “Social Contract” Is Changing

Business, China, Company Strategy, Economics, Environment
By John Richardson on 04-Jun-2014


By John Richardson

ChinapollutionON this particular day, it is worth thinking some more about how the social contract between China’s leaders and its people is evolving.

Much of the commentary focusing on 4 June 1989 has described how China’s leaders have maintained social stability ever since, partly through rapid economic growth.

But too many commentators haven’t made the next step, as they haven’t discussed how and why this contract is evolving.

Despite some opinions to the contrary, we think that the nature of that contract is undergoing radical and genuine change.

It has to change and here just a few of the reasons why:

  • People are  unhappy at the state of the environment.  Why live in a country where your children have reduced life expectancy and so why not get out if you have the money? These are the middle class people that have to be made to stay because they are the entrepreneurs needed if China is going to escape the middle-income trap. The debt explosion has made the environmental crisis much worse over the last few years because of all the factories that have been thrown up, too much additional coal-fired power generation and out-of-control growth in car ownership.
  • The rise in debt has also made inequality worse. Some 30% of property purchases have been by government officials and their contacts –  in other words, a small percentage of people have benefited from the “wealth effect”. Meanwhile, the middle classes, and the poor, have been squeezed by real  living costs that have risen much-faster than headline inflation rates indicate.

This explains why China’s leaders are firmly committed to adapting the social contract.

There will be policy mistakes and occasional minor backtracking on the way, but the direction is clear.

It isn’t going to be an easy process and lower growth is guaranteed, but China, really, has no other choice.