October 1, 2009 / 9:39 AM / 10 years ago

SCENARIOS: Key forces shaping China's long-term future

SINGAPORE (Reuters) - As China marks 60 years of Communist Party rule, predictions abound on how it will change in decades to come. But long-range forecasts are often wildly wrong.

A more helpful approach for investors may be to identify key trends and forces shaping China’s economic growth and geopolitical influence, so that they can analyze different possible paths, and be better prepared for inevitable surprises.

Following is a summary of key long-term issues for China:

POLITICAL STABILITY

Two decades after the trauma of the Tiananmen Square crackdown, China is enjoying remarkable political stability. Predictions that the global economic downturn would spark severe unrest in China have proven unfounded — while there are regular eruptions of localized unrest, popular support for the central government remains strong. The most important issue for forecasters of China’s future is whether this can continue.

Most analysts see no evidence of any imminent change. But many of the revolutions and political convulsions that shaped the past century — from Russia in 1917 to Iran in 1979 to Yugoslavia in 1989 — have taken forecasters completely by surprise.

George Friedman, chief executive of STRAFOR, argues in his book “The Next 100 Years” that China will break up by 2020.

“China is gambling at the beginning of the 21st century that it can carry out an indefinite balancing act,” he wrote.

“The assumption is that it will be able to gradually shift resources away from the wealthier coastal regions toward the interior without meeting resistance from the coast and without encountering restlessness in the interior.”

Such views are greatly in the minority. But one lesson of China’s history is that the country often confounds expectations.

DEMOGRAPHICS

Demographic factors have helped fuel China’s rapid growth, but Goldman Sachs says “the demographic headwind will turn into a significant tailwind.” The country will have to deal with an aging population and a declining labor force after 2030.

Two forces are driving these changes — increased longevity, and the “one child policy” which constrains population growth.

A build-up of human capital and the release of surplus labor from the agricultural sector will mitigate the problem, but the most significant way the government can prevent labor shortages constraining growth would be to relax the one child policy.

Assessing alternative future scenarios, Goldman forecasts significantly higher GDP growth if the policy is phased out.

HUMAN CAPITAL

Education is at the heart of long-term economic development. As China industrializes, and labor migrates from agriculture to more skilled industrial activities, it must ensure its education system builds the human capital needed.

“Only if youngsters from the countryside receive better education opportunities and skill-sets will they be able to migrate to cities to take more permanent positions in high value-added industries,” Goldman said in a 2006 report.

THE ENVIRONMENT

Beijing has pledged to reduce “carbon intensity” over the decade to 2020, but also says economic development must come first and developed nations should bear most of the responsibility for reducing global emissions. China’s rapid growth is also causing pollution problems in many areas.

With so much of its industrial capacity located in coastal areas, China could be highly vulnerable to rising sea levels.

How the country deals with environmental problems and emissions constraints will be a key issue for long-term growth.

STRATEGIC RESOURCE NEEDS

China’s hunger for energy and commodities has major geopolitical implications — there are signs of a backlash in both developed and developing nations against China’s attempts to secure long-term strategic supplies through investing in key countries and companies. A key question is whether Beijing can secure its resource needs without sparking a wider backlash.

Editing by Sugita Katyal

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