As 2015 ended, China enters 2016 with renewed hopes and a widespread pride for great achievements on the global arena, but it also confronts with new and old challenges. In his New Year’s message, President Xi Jinping applauded some remarkable accomplishments of 2015 and warned that the efforts for the construction of a comprehensive moderately prosperous society (全面建成小康社会) are still in progress. As Xi Jinping stated, China will keep fighting widespread corruption and poverty. The latter, especially, has been noticeably highlighted in Xi’s words.

The highlights of 2015 should not be underestimated. President Xi’s meeting with Taiwan’s leader Ma Ying-jeou in Singapore marked the first historical opening after the foundation of the People’s Republic of China. The climate change deal signed in Paris comes after decades of paralyzed negotiations, and Beijing, this time, played a decisive role giving a strong signal of commitment and leadership. The renminbi made significant steps ahead in its path to become a global reserve currency, as it has been included, this last November, in the IMF Special Drawing Right basket. The signs of a growing national system of innovation are promising, as China gradually moves up the value chain and becomes a creator of knowledge and new products, no longer a mere manufacturing and assembling laboratory. The journalistic famed expression “from made in China to created in China” deservingly hit the headlines in 2015. Highly symbolical in its disclosure, Xi Jinping saluted the China-designed C919 jet airliner as a progress in this sense. The winning of the Nobel Prize for medicine by Chinese scientist Tu Youyou seems to remind the world that China is filling the gap with the Western countries in the scientific research domain as well.

Despite these achievements, some profound and crucial dilemmas are still to be faced in this 2016. Reviewing the top global newspapers, media outlets and China’s state media channels, there are some recurring concerns that commentators identified as the top challenges of this brand new year.

5. Unemployment

Unemployment is hitting hard in China. The official figure corresponds to about 4%, but the actual rate is difficult to calculate and it is much controversial, some experts even arguing it can be as high as 10%, depending on the parameters considered. Furthermore, the informal sector is so large that statistics fall short of giving us a genuine picture of what is going on in China. Indeed, finding job is increasingly hard for both rural and urban workers. Industrial overcapacity, a slowing-down of manufacturing demand and an increasing pool of new graduates (7 million every year) add pressure to the job market, whose vacancies are shrinking fast. Chinese government is inviting young graduates to take their destiny in their own hands, developing an entrepreneurial mind, launching start-ups, taking their own risks and contributing to the national innovation system. Venture capital funds and incubators have been established and incentives have been promoted to support small and new-born enterprises.

4. Industrial overcapacity

Industrial overcapacity became the buzzword of fall 2015, for legitimate reasons. Well aware of the great inefficiencies of big corporations and state-owned enterprises, the Chinese government is ready to reform the industry. The goal is improving the efficiency and quality of labour and capital inputs, boosting the development and adoption of advanced technology and embracing smart management practices. While it is true that demand should be sustained, it is also crucial that supply should be reformed. To reach a more effective allocation of resources is paramount condition for China in 2016. Reducing capacity and cutting costs while, at the same time, rising total factor productivity are the way to go for Beijing. To do so, China must also pursue a sleeker bureaucracy, fiscal adjustments, push ahead decentralization, and allow competition to naturally select the fittest companies.

3. Aging population

As the famous tagline goes, China risks getting old before it gets rich. According to the World Bank, the country’s working population (15 to 64 years old) will drop by more than 10% by 2040. This is bad news, as only a shrinking portion of active workers will have to sustain and pay for millions of retired people and infants, hence rising the dependency-ratio to unsustainable levels. At the same time, policy-makers worry about the gigantic size of China’s population and its dramatic pressures on available resources. The aging population is the result of heightened living standards, massive improvements in the healthcare system and, in the case of China, of the One-child policy, launched in 1978 and officially discontinued as 2016 begins. Chinese people are now allowed to have two children for couple, however, according to some China-watchers, it is too late to alleviate the effects of an aging China. Another proposal to address the problem is to raise incrementally the retirement age, in order to sustain the pensions’ budget.

2. Financial market volatility

China’s 2016 started with a stock market drama. The 4th January, Shanghai and Shenzhen composite indexes collapsed to a staggering -7%, triggering, again, global financial turmoil and causing top regulators to halt the market. During summer 2015, China’s stock market dropped of about 30% from its peak, after a period of inflated investments, largely made by individual investors (who owns 80% of tradable share in China’s stock market). The choice of individual investors are mostly guided by uninformed perceptions, rather than expertise in the financial sector. Chinese Government intervened by suspending large part of the market, prohibiting new IPOs, and inhibiting selling of shares affecting large pension funds. The volatility of Chinese financial market may be explained by different factors, but what the most part of China-watchers identify as major causes are the slowing down of the overall economy, the diffusion of alternative investment vehicles, and increasing public and private debt, mostly used to finance infrastructure or real estate projects with low – or no – returns.

1. Environmental pollution and degradation

Pictures of Beijing covered in smog have been featured on newspapers worldwide in winter 2015, few months after the capital won the bid to host the 2022 Winter Olympics Games. However, smog and – more generally – overall environmental degradation (of soil, air and water) are not just affecting China’s worldwide prestige. The effects of pollution have especially dramatic consequences on the health of people. Almost a decade ago, the World Bank, in a joint study with China’s State Environmental Protection Administration (now Ministry of Environmental Protection), estimated the economic costs of pollution in the country to be included between 3.5 to 8 percentage points of GDP, an enormous figure. 30 years of economic growth and lax environmental standards have produced an unsustainable model, which is hard, but not impossible, to retrofit. Provinces are competing for GDP growth and local cadres’ incentives are still de-linked from a good performance in environmental protection. A new Environmental Law came into force in January 2015, promoting an increasing accountability for polluters and for government organs and officials, an increased transparency and public disclosure of data, the possibility for registered NGOs to file public interest lawsuits. Although this is a much needed improvement, the economic incentives are still to be aligned effectively with the logic of environmental protection. How China will address this conundrum will be, very likely, the most critical challenge of 2016.