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18th Party Congress

The Chinese Communist Party's 18th Congress, held in Beijing November 8-14, 2012, marked a key power transition in China. A new generation of leaders, headed by Xi Jinping and Li Keqiang, took over from the previous leadership headed by Hu Jintao. The Communist Party's Politburo Standing Committee was reduced in number from nine to seven. Unlike his predecessor Jiang Zemin, Hu Jintao handed over both the Party General Secretary and Chairman of the Central Military Commission positions to Xi.  

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China's new economic team must grapple with multiple challenges

China's economy faces challenges that call for bold reforms. But its new leaders are expected to favour status quo and a consolidation of power

PUBLISHED : Wednesday, 17 October, 2012, 12:00am
UPDATED : Saturday, 20 October, 2012, 10:51am

China's new economic team, likely to be led by incoming premier Li Keqiang from March, will be confronted with many daunting challenges, domestically and internationally.

In the short term, the new government will have to tackle a slowdown in growth, which hit a three-year low last quarter.

In the longer term, it will have to deal with deep-rooted flaws in the mainland's economic system - quasi-state planning and a quasi-market - and worsening structural problems. They include the market-distorting powers of state monopolies, widespread official graft, an unbalanced industrial structure, an ageing workforce and widening wealth gaps between regions and individuals. Together, they point to deepening social tension that could threaten party rule.

Analysts and economists also hope the new leadership - to emerge at the Communist Party's 18th national congress, before taking over the reins of government next year - will revive long stalled market-oriented reform. They say that after three decades of breakneck growth, the economy is reaching a critical point in its development.

Early this year, French bank Societe Generale warned that although China's economic growth would slow significantly, the party would put off decisive action until March, resulting in the likelihood of an even harder landing.

Some analysts say the phenomenal economic growth of the past decade - only sinking below 10 per cent during four of those years - has been achieved at excessive cost, which all sectors of the economy, including workers, businesses and the state, will have to bear for years to come. They say structural problems have worsened in the past decade, with the mainland economy now less balanced and growth more unsustainable.

Hao Hong, head of mainland research at the Bank of Communications in Hong Kong, said the mainland's economy was at a critical juncture and "it is time for reform".

But citing Chinese philosophy's attachment to the doctrine of the mean ( zhongyong) and non-action ( wuwei), Hong ruled out any immediate revamp. "The old leaders' thinking and economic management is likely to continue to exert its influence on the new leadership," he said.

Most China-watchers and economists agree that the new leadership will follow their predecessors' policy prescriptions for some time, with the primary goal of ensuring stability before they consolidate their power and seek new breakthroughs.

Professor Steve Tsang, director of the China Policy Institute at the University of Nottingham in Britain, said "not that much will change".

"The main partnership represents a forced marriage, between incoming president Xi [Jinping ] and incoming premier Li, with each other's default option being to fall back on their backers for support," Tsang said.

Xi's main patron is former party chief Jiang Zemin , while Li is a protégé of President Hu Jintao , who is due to step down at the party congress. Jiang and Hu are seen as the leaders of the two main factions within the party.

Tsang said that meant Xi would not be in a position to put a powerful stamp on policy or direct a major policy shift, while Li had shown himself to be more of a "Teflon" politician than a premier who would assert that the buck stopped on his desk.

"He is unlikely to drive policy change much," Tsang said, adding that this would give Wang Qishan , should he become the executive vice-premier, relative freedom to manage the economy.

"Should the economy slow down seriously and cause major social disturbances, the fun will start as the top leaders try to find a consensus on how best to deal with that," Tsang said.

Dr Liao Qun, chief economist at Citic Bank International, said the policy and reform direction of the new leadership would be largely the same as that of the existing one.

"But as with any other new leadership, it will seek breakthroughs in new areas," Liao said.

Kerry Brown, head of the Asia programme at the Chatham House think tank in London, said people could expect policy continuity for the duration of the 12th five-year plan, running until 2015.

"That sets out the consensus position on growth targets and macroeconomic objectives, and acts as the bridge between the leadership groups," Brown said. "This document is the result of party- and government-wide consultation, so to disrupt it would be a huge problem."

Brown said such disruption would only be countenanced in the event of a massive external shock, like a rapidly worsening global economic slowdown. Then ideas outside the plan would be needed.

Economists said that in the near term, the new administration would have to deal with a global economic slowdown and weakening demand, both domestically and overseas.

"It must act to stabilise growth while containing inflation," Hong said. "We are likely to see a series of monetary easing actions and probably fiscal stimulus."

Liao said that regarding short-term macroeconomic policies, the new government would be more responsive to continuing volatility in the external environment. Stronger and more flexible monetary and fiscal policies should be applied to maintain high rates of economic growth, with fiscal policy likely to play a greater role.

He said longer-term reforms were likely to focus on five areas: promoting the private economy by improving the financing environment for small and medium-sized enterprises; accelerating the restructuring of state-owned monopolies; upgrading the economic and industrial structure by fostering strategic, emerging industries, promoting innovation and curbing overcapacity; speeding up financial reforms, including interest rate liberalisation, internationalisation of the yuan and further commercialisation of state banks; and reducing the wealth gap by accelerating income growth and raising social-security levels for those on lower incomes.

Hong said interest rate liberalisation was the key to market reform and should top the new government's agenda.

Interest rates on the mainland had been abnormally low because they had not been set by the market, he said. That had led to overinvestment and the misallocation of resources.

Hong said he also expected that making the yuan more international and opening the capital account would be given higher priority in the coming decade. He said he had already seen traces of such reforms, including recent asymmetric cuts to interest rates and the sealing of offshore yuan-settlement agreements.

They were the first steps in a long march towards the final reform, he said, but "the train has left the station".

"These changes will lead to a revaluation of the Chinese currency and a rise in capital costs," Hong said. "It is the reason why capital-intensive industries may be facing a persistent, long-term decline.

"Meanwhile, together with these reforms, there will be financial innovations and dramatic growth of the capital market."

Hong said industrial policies would focus on new sectors - hi-tech, services, health care, the environment, new materials and new energy - many of which were not capital-intensive. "These policy changes are likely to be implemented over the coming years, and their effect on economic restructuring will gradually become evident," Hong said.

Analysts said that an unstable backdrop might force the new leadership to make hard choices on whether to revive market reform because the legitimacy of party rule rested on its ability to maintain growth, spread prosperity and achieve social stability. That would involve tackling scores of issues, including widespread corruption, land-rights conflicts, a lack of investment in education, housing and medical care, and pollution.

But Harley Seyedin, president of the American Chamber of Commerce in South China, said he was confident that China's new leadership could overcome such challenges.

"I am supremely confident that both gentlemen [Xi and Li] will help build a future characterised by sustainable economic growth, increased integration with the global economy and a continuation of the opening up that has been a cornerstone of China's success for the past 30 years," Seyedin said.

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