China 2.0

As part of his call last week to create an "innovation economy" within 15 years, Hu urged the Chinese to invent proprietary technologies and vowed to boost state R&D spending, which was just 1.23 percent of GDP in 2004. (Japan and the United States spend 3.3 percent and 2.7 percent of GDP, respectively, according to the OECD.) China is already cracking down on construction projects that fail to conduct required environmental feasibility studies. Beijing is pursuing clean-energy sources; to maintain high GDP growth rates, China needs to double its power-generation capacity by 2020.

Beijing plans to spend $185 billion by 2020 to develop renewable energy. In particular, the Chinese need to be weaned off coal, a cheap but dirty energy source that accounts for more than 70 percent of the country's power production. Although energy conservation and recycling are two other trendy catchphrases nowadays, many Chinese remain hugely wasteful. Leaky faucets are left to run, partly because urban water is only about one tenth as expensive as in Germany. Petrol is heavily subsidized, costing about one fourth of what it does in the United States. Although they've raised water fees incrementally, Chinese authorities worry that substantial water, power and fuel price hikes will prompt protests. "To realize 'green GDP,' one has to pay a big price," says analyst Li Shi of the Chinese Academy of Social Sciences.

Turning China's behemoth economy in a different direction will be a long-term challenge. And many provincial governments may resist. "Local government officials won't be happy with this idea," says Xia. "They might support it [publicly], but boycott it behind the scenes." Local authorities chase quantifiable achievements that come with making and building things. Most serve three-to five-year terms in office, explains Xia, so they want to see the kind of tangible results that lead to promotions--more factories, rising exports. Dong Baoping, dean of the Beijing Science and Technology Management College, says that local governments have often "turned a deaf ear to the notion of environmental protection."

There are no easy answers. Li says that Beijing may have to choose between "slower economic growth with high quality, or rapid economic growth with low quality." That's an unappealing trade-off in a nation that must generate at least 17 million new jobs every year for young people entering the work force. In other words, China cannot afford to let traditional GDP growth dip too low. "We have a serious employment situation; we need to balance feeding people adequately while doing a good job of environmental protection," says Li. To succeed at that task, Hu and his Politburo colleagues may well be hoping for a second economic miracle.

© 2006