China’s New Experiment: Financial Equality

BEIJING | Following the footsteps of Deng Xiaoping’s reforms in the Southern province of Guangzhou, China seeks now a new round of economic experimentation. Cosmopolitan Shanghai will host a controversial Free Trade Zone (FTZ) that should ultimately crown China’s financial capital as the new engine of growth.

This time around, the goal of this new hub for experimentation will be to attract foreign investment as it tests new deregulation rules that should give foreign companies greater flexibility. It’s a landmark step, but FTZ will only manage to attract fresh capital investments if it truly offers equal investment opportunities to both Chinese and Foreign companies. So experts wonder whether China is ready for such financial equality. Most importantly, when China’s economy will actually start seeing the results. This scepticism is bringing experts to urge reforms in other areas they see also crucial to the future development of the superpower. Take the education system as an example. By the end of August, Wall Street Journal quoted the study of the local NGO local 21st Century Education Research Institute to highlight Chinese lack of confidence in the traditional education system.

According to the figures, the report says, 54% of the parents that took part in the study opted for home-schooling. Their fears that extremely traditional Chinese schools would end up wiping away their kids spontaneity and brilliant minds brought them to take the decision. The figures also stress a powerful change of mentality in China’s urbanites who are desperately seeking alternative systems.

McKinsey’s latest report points out the Chinese consumer is getting increasingly confident about his/her own future. Being even more optimistic than their Western counterparts, with a 56% of the Chinese believing their salary will considerably rise in the next five years. The consultancy firm estimates that this wave of confidence will go hand-in-hand with a dramatic transformation of the Chinese consumer. Middle class will decrease to just a 22% of the population (compared to a 54% in 2012). And a growing upper-middle class, 54%, will take over (compared to a 14% in 2012. In other words, the annual household income of the Chinese consumer of the future (year 2022) will be between 160.000 and 229.000RMB (19.600 and 28.000 Euro a year).

Only nationwide reforms in critical sectors will ensure the growth of these increasingly wealthy households really translates into much needed purchasing power. Consequently, China should move towards a more equal model. The fight against corruption of the Chinese president Xi Jingping shows there’s still a long way to go. While at the same time it demonstrates the main challenges Shanghai’s FTZ is facing. Powerful steps have already been taken. Like is the case of the trial against the former Chinese leader Bo Xilai, charged with corruption and abuse of power. Or the investigations against high level executives of the powerful state-owned Chinese oil sector.