Handover year puts China to test
Will the China of tomorrow look anything like the China of today? Unlikely, but the differences will be subject to wide interpretation. Many Western observers view recent economic and political events as only part and parcel of the continuing conundrum that is China.
As a Hong Kong resident, I view these events as groundbreaking economic and political steps in China's coming of age in the new global economic order. I believe that seemingly unrelated events, such as the recent easing of the policy on currency, and the handling of political intrigue both on the mainland and in Hong Kong, are all ingredients of a thoroughly tested transition plan.
The once-a-decade leadership handover - originally scheduled for this autumn but now widely rumoured to potentially be delayed to November or January - is in reality well under way. And this transition will probably herald the arrival of a true economic superpower, the likes of which has not been seen since the rise of the Japanese economy in the immediate post-war era.
To be fair, China's skills at planning, setting priorities and executing decisions will first have to pass a tough test: the global economy is slowing and stresses from a prolific credit cycle are popping up, most notably in the property sector.
My view, however, is that while real reforms to rebalance the economy will be postponed until after this year's transition, the current administration has three broad objectives to guarantee stability during and after this important leadership handover.
The first objective is to ensure social harmony - China's perennial top priority. Expect measures to promote domestic consumption and to curb the increase in property speculation that has deepened social and economic inequalities. The new leadership will probably push these measures hard next year and beyond as China mobilises all efforts to lift the overall living standards of the millions who, despite the economic successes of some Chinese, continue to live merely at subsistence levels.
It is clear that China urgently needs to blur the divide between the haves (mostly in coastal, urban areas) and have-nots (mostly in rural areas). Wages have started to rise in the interior areas, where the cost of living is significantly lower, so there is at least some evidence that the blurring could begin to happen.
This first priority of social harmony also explains why authorities are not overly concerned about lower growth forecasts, as the government recognises the switch from an export- to a consumption-based economy will result in lower gross domestic product growth in the short term.
China's second policy objective is to lay the ground for a smooth transition of leaders. Why should this be a high priority, given China's hegemonic one-party system? Precisely because the elite recognise that internal political struggles can derail the first objective of social harmony. This assertion is supported by the possible delay to the upcoming congress, which underscores the internal politicking required to build a consensus and ensure stability.
In my view, the suspension of Politburo member Bo Xilai - based on suspicions of corruption and association with alleged criminal acts - underscores the determination to ensure that reforms put forward by the current leadership do not lose momentum during the transition.
Conventional Western wisdom that a president is a lame duck in his last year does not apply in Chinese politics. The long-term agenda must prevail for a country of China's size to avoid the risk of broader social unrest during the handover. And although something of a 'sideshow' in geopolitical terms, the last-minute shift in Beijing's support for the incoming chief executive in Hong Kong proved leaders are far more in touch with the popular mood than some may think.
Finally, the third policy objective must be the continued economic momentum of China, combined with rebalancing the economy towards domestic consumption. It's worth remembering that this is only the second year of China's 12th five-year plan, which expands beyond the continued focus on building infrastructure to address rising social inequalities by promoting more equitable wealth distribution and improving social safety nets.
The recent widening of the renminbi's trading band and the broadening of quota allocations for China's qualified foreign institutional investors scheme, through which foreigners can own larger equity interests in Chinese companies, are indications that economic reforms also remain a top priority during the leadership transition.
Of course, implementing these three policy objectives is no easy task, not least because managing a country of over 1.3billion people presents considerable economic and social challenges. I firmly believe, however, that China's emergence as a true economic superpower will happen - a development that can benefit savvy global investors and for which the world's politicians need to prepare.
Mark McCombe is chairman of Asia Pacific for BlackRock, Inc