that the occasional campaign against corruption, without structural changes, will lead to long-term results.
There is constant speculation in Western media that China is slowly moving towards democracy. This is not a strong prospect any time soon as the majority of the population seem to be satisfied with the Communist Party’s handling of the economy, which has helped to lift millions out of poverty.
Below we list some of the factors that measure political risk and quality of governance.
China’s EIU political risk ranking has improved from 57 in 2005 to 54 in 2012.
China’s Alliant Political and Econ ranking has worsened from 49.88 in 2005 to 48.64 in 2012.
China’s Freedom from Corruption score has improved from 34 in 2005 to 35 in 2012.
China’s Regulation Freedom score has improved from 30 in 2005 to 46.4 in 2012.
China’s Freedom of Government score has worsened from 64.8 in 2005 to 54.8 in 2012.
Conclusion
China has made modest improvements on the scores above. It still faces considerable political risk arising from social unrest and excessive censorship. In the last two years the Chinese public has been angered by corruption and displays of wealth by public officials. Unless China launches a massive corruption crackdown its ranking can be expected to deteriorate in the coming years.
Business conditions
China’s Ease of Doing Business rank has worsened from 86 in 2009 to 91 in 2012.
China’s Starting a Business rank has improved slightly from 152 in 2009 to 151 in 2012.
While the output of state-owned enterprises in China has declined they still hold considerable influence in the Chinese economy. This situation is not expected to change any time soon as many Chinese state-owned companies have been restructuring and adopting global management practices to compete with the private sector and foreign companies.
Conclusion
It is still not easy for a newcomer in China to succeed in business without having a connection to the Communist Party. The same rule holds true for foreign companies looking to enter the Chinese market. A more meritocratic set up could play a big role in unlocking further growth and innovation.
Technology, innovation and infrastructure
China ranks 34th on the 2012 Global Innovation Index, higher than all the other BRIC countries. Although China has gained a reputation for copycat inventions it has historically been an innovation superpower with inventions including the compass, gunpowder and the printing press. With support from policy makers China’s R&D spending hit $159 billion in 2012 and is growing at 20% a year.
China’s minister of Industry and Information Technology has announced plans to have broadband coverage in China hit 250 million users by the end of 2015. This is part of the 2013 Broadband China project, which aims to increase FTTH (fibre-to-the-home) coverage by more than 35 million households in 2013. The blog Tech Crunch reports that as of December 2012, China had 564 million internet users. According to a report by the China Internet Network Information Center (CNNIC) this is a penetration rate of 40%.
China is already the world’s biggest mobile market with 1 billion users and it has passed the 500 million mark in terms of smartphone users. According to On Device Research, 38% of Chinese internet users access online services solely from mobile devices. Exhibit 9 shows growth in China’s mobile penetration. This growth in mobile penetration has made China the largest smartphone consumer in the world. This could be a precursor to a robust digital and e commerce economy in China.
Exhibit 9 – Mobile penetration
Data: Bloomberg, World Bank
China ranks 42nd out of 70 countries in the 2010 Digital Economy ranking. Only Brazil outranks China among the BRICs. A recent Stanford University study made the following conclusion about China’s digital divide:
“We find the gap between computer and internet access of students in rural areas and urban public school students is extremely wide. Migration itself does not appear to eliminate the digital divide. Only when migrant families are able to enrol their children into urban schools does the divide substantially narrow.”
China has to seriously address this issue to avoid future unemployment and income inequality problems.
In 2011 China overtook the US in the number of patents filed. While many believe that the quality of the patents filed are suspect, it could in fact be seen as evidence that the government and companies in China have realised the need to move up the value chain to compete in a global economy.
According to the Chinese ministry of finance, the government plans to spend $19 billion on local transport infrastructure. A Bloomberg article in late 2012 reported that China planned to build 2018 km (1254 miles) of roads, and 25 new subway and inter-city rail projects worth more than $126 billion. Also in 2012, the government approved nine sewage-treatment plants, five port and warehouse projects, and two waterway upgrades.
China has struggled to expand its power grid to keep up with demand. According to the Energy Research Institute, capacity needs to grow from 1060 GW (Giga Watts) in 2011 to 1500 GW by 2050. China remained the world’s largest energy producer for a fifth straight year in 2012, with its hydropower and wind power sectors boasting the world’s highest capacities. It has also invested billions of dollars in solar energy. Its infrastructure is far more robust than India’s, for example, and there have been no major blackouts in the recent past to indicate a major shortage.
Conclusion
Chinese policymakers have realised the need to move up the innovation value chain in order to compete with the United States. At the same time China needs to make better efforts in patent protection and this as an area of concern that could hold China back. For a country the size of China, the state of digital and physical infrastructure is much better than its emerging market peers. It still needs to do a lot more to catch up to OECD standards, however.
Human development
During his time in office Premier Wen Jiabao remarked that China had met its stated goal of education spending targeted at 4% of GDP (the target was set in 1993). The government spent $1.25 billion from 2008 to 2012 with an average annual increase of 21.6%, or 4% of the nation’s GDP in 2012. The government plans to maintain spending at 4% of GDP and increase monitoring of how funds are spent.
According to Bloomberg, healthcare spending in China is expected to triple to 1 trillion by 2020, driven mostly by an aging population and government efforts to broaden insurance coverage. According to McKinsey, China is expected to increase healthcare spending from 5.5% of GDP to 7% of GDP. The government is looking to provide a safety net for the large portion of the population that will be retiring in the coming decades.
China is making a $250 billion a year investment in human capital in an effort to create a broadly educated workforce.
Meanwhile, private industry is also taking the lead to make sure the graduates they are hiring have the skills to be productive in their jobs. For example, carmaker Geely has started the Beijing Geely University that trains about 20,000 students in science and engineering, specifically in auto engineering.
In the last decade China has doubled the number of colleges and universities to 2409 and produces 8 million graduates a year. China is aiming for a large, more broadly skilled workforce to compete with the West as it looks to take the lead in several industries including alternative energy, energy efficiency,