Ageing population, labour force shrinking and number of pensioners soaring: can China avoid the fate of Japan?

From breakneck growth to an ageing population, the comparison with its near neighbour is striking – and look what happened there

Beijing

Wu Renbao didn't get to experience the age of Xi. The renowned Communist party chief of Huaxi, an agricultural commune inland from Shanghai, died aged 85 a week ago today, just days after Xi Jinping was sworn in as China's new President. Villagers who had become rich thanks to Wu's entrepreneurship packed the memorial hall at his wake, wailing in their grief.

50 years ago, Huaxi was no more than a smudge on the shore of the Yangtze, but under Wu Renbao's shrewd direction, a metal-processing plant was set up and the village farmers turned into factory workers. Somehow, Wu managed to get permission to set up other factories in the ex-commune, producing everything from tobacco to textiles. Today, Huaxi is the richest village in China.

Wen Renbao made sure all the original residents benefitted from Huaxi's rise. Sun Haiyan, deputy party chief in the village, told China Daily: "Now the 2,000 registered residents of the village all live in villas, have luxury cars, and each has an average deposit of at least 1m yuan (£106,000)"

The symbol of Huaxi's triumph is a 328m-high skyscraper in the village, 20 metres taller than London's Shard, with a huge globe on the roof. On the building's 60th floor is a sculpture of an ox, cast from a ton of gold.

Huaxi's transformation is amazing, but Xi Jinping's problem is that it can only happen once – and even that one time comes with costs. It is unlikely the children of those affluent villagers will fancy soiling themselves with the sort of work their parents and grandparents did, whether in the fields or the factories. And meanwhile even the China Daily's painfully discreet reporter cannot avoid mentioning that Huaxi's wealth adhered more plentifully to some villagers' pockets than to others. "Wu's four sons… dispose [of] 90.7 per cent of the village's funding," he noted.

It must be exhilarating to take charge of a country whose economy may soon become the biggest in the world, and great hopes are pinned on Xi Jinping after the robotic years of Hu Jintao.

As the son of Xi Zhongxun, a first-generation party leader who, after years of humiliation during the Cultural Revolution, created China's first special economic zone, he knows what it takes to bring about drastic change. He is famous for his brusque, straightforward manner: he began his term as party leader with a 20-minute speech, in stark contrast to the lengthy orations of the past. His wife, Peng Liyuan, a folk singer and national celebrity, has already become a diplomatic star, attracting attention at home and abroad while accompanying Xi on his first state visit since taking office – beginning with a three-day trip to Russia to meet President Vladimir Putin last week. Already far more visible than her predecessors, she has carved out a new presence for the role of China's First Lady; and the resulting fame does Xi no harm.

China's economic interests are at the centre of Xi's trip. Oil and gas deals dominated talks with Mr Putin. Now, Xi is in Africa. Having arrived in Tanzania yesterday, he held trade talks with President Jakaya Kikwete. The next stages of his trip will take in the Democratic Republic of Congo and South Africa, for a meeting of the BRIC nations (Brazil, Russia, India and China).

So it would be ironic if this youthful, earthy, energetic leader presided over the years when China peaked – the first years of China's decline. But that's the writing on the wall.

I spent a couple of days last week in the quarter of Sanlitun, in central Beijing. Originally the solemn centre of the capital's diplomatic activity, with envoys and press agencies housed in large, dignified blocks, it has let its hair down in recent decades, with bars and restaurants fighting for the foreign dollar. But today, while the foreigners remain, all the real money is home-grown, flaunted in the Bentleys and Porsche Cayennes which cruise the lanes. The seedy, rackety bar life has been replaced by sleek restaurants and boutiques, set on what is now an elegant boulevard.

For me it was all a charming surprise: here China's sharp edges have been knocked off, its arriviste vulgarity flushed away. It was uncannily like being back in Tokyo in the mid-1980s, at the height of Japan's boom, when Japanese fashion and architecture began to conquer the world.

The similarity is not surprising. While China is reluctant to admit having learned anything from its eastern neighbour, it has trod a very similar path: these are both centrally directed economies which grew vastly rich exploiting the cheap labour coming from the countryside; the main difference is that China is ten times bigger.

It is also 20 years behind. And when you consider that it was a little over 20 years ago that the Japanese property bubble burst and the economy suddenly began to shrink, you can see why this is not a comparison China likes.

Yet just as the ingredients of the miracle are much the same, so are the auguries of decline.

Like Japan in the 1960s, the Chinese elite has a massive corruption problem, one that both Xi Jinping and his Prime Minister, Li Keqiang, have promised to deal with. But ordinary Chinese will take a lot of convincing that they are serious: as in Huaxi village, where the sons of the patriarch have cornered most of the spoils, the disproportionate wealth of the Communist aristocracy seems inherent to the system – a fact of life that is grudgingly accepted as long as everybody else is getting richer, too. In his inaugural speech, Li said: "Pursuing government office and making money have been 'two separate paths' since ancient times." If China had even the shadow of a free press, someone might have stood up and asked him why, in that case, the combined wealth of the 70 richest delegates to the National People's Congress (figures for 2010) was £60bn .

The corruption endemic to a command economy like this is tightly wedded to another problem that foreign experts see as limiting China's hopes of continued growth: the refusal, as James Kynge of China Confidential said in Beijing last week, to "set money free to find its real price." The Chinese leadership, he said, "want to use money but they don't want to be used by it – they don't want to be judged by money. Yet if you remove the power of money to go where it wants, you remove the compass and the radar of money – it just skitters around. You have to allow interest rates to be set by the market: interest rates are a democratising agent, they require transparency."

Is China ready for such a radical shift? It seems unlikely. Instead there is a cracking of the whip and calls for frugality and a cutback on banquets, while life goes on as before, with the black economy that has ballooned in the past three years continuing to grow much faster than its official equivalent.

Meanwhile the structural issues that brought Japan low loom over China, too. The population is ageing: the labour force shrank by 3.45 million in 2012 and is set to go down 10 million per year from 2025, while the number of pensioners is soaring. One of the nettles Xi and Li will have to grasp will be to raise the retirement age, an issue that is bound to cause anger. Relaxing the one-child policy would, by contrast, be a popular move, but would only produce a new crop of workers 20 or 30 years down the line, by which time it might be too late.

So how can Xi prevent China following Japan into the twilight zone? One possibility – the one that haunts the sleep of policy-makers from Tokyo to Washington – is that China will seize its moment of pre-eminent wealth to turn into a serious empire-builder; not merely leaning on its South-East Asian neighbours and rattling the sabre at Japan over the disputed ownership of the uninhabited Senkaku/Daioyu islands, but seeking to use its new naval bases in the Indian Ocean – its so-called "string of pearls" – to overturn the US-dominated status quo in the Middle East. This will not happen any time soon: China likes to repeat that it believes in "win-win" and "a harmonious world", and there can be no doubt that it puts a high value on stability, one that a naked assertion of might would risk shattering. But, stunning though China's economic achievements are, it is trapped in a developmental blind alley.

"Hide your strength, bide your time," the wily Deng Xiaoping – the reformist party leader who took China towards a market economy – used to advise. Xi Jinping now has slightly less than ten years in which to make his move.

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