Will China rebalance its economy? The Communist Party meeting that starts on October 15 will tell

10/06/2010 9:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

More of the same growth at all costs plan or something different?

That’s the big question that will be fought out when China’s leaders meet for the Communist Party’s annual get together from October 15 through 18.

 The meeting will set China’s next five-year economic plan. In past years the country’s leaders have built that plan around a call for growth, 8% annually in recent documents. That has put local leaders on notice to deliver or else. And that has led to local tactics to maximize growth that seized land from peasant owners for inadequate compensation, that looked the other way on horrific environmental pollution, and that used local security forces to crush protests on pay, working conditions, pollution, and land seizures.

The rigid growth goals of the five-year plan have also contributed to runaway bank lending in 2009 and, it looks like, again in 2010. Officials afraid of missing their growth targets have kept inefficient state-owned businesses afloat with cheap capital from bank loans. This has in turn exacerbated the imbalance in China’s economy by leading to over-investment in heavy, frequently state-owned industries directed at export markets and under-investment in privately-owned companies focused on the domestic consumer markets.

On the run up to the meeting reformers, including possibly Prime Minister Wen Jiabao, have advocated goals that would tackle the massive and growing inequality in China—and the use of Communist Party connections to amass vast wealth. The most recent list of the Hurun Rich List, which began ranking China’s wealthiest people a decade ago, this year shows 1,363 yuan billionaires in China and an estimated 400 to 500 U.S. dollar billionaires. In 2009 the per capita net income of rural Chinese was $769 a year. The per capital disposable income of city residents was $2,510.

I say “possibly” Prime Minister Wen because in August he delivered a speech, printed in the party’s People’s Daily, in which he said “Without the guarantee of political system reform, the successes of restructuring the economic system will be lost and the goal of modernization cannot be realized.”

That speech has since prompted rejoinders from officials such as Zhou Yongkang, head of security, who wrote in another party journal that some party members had been infected by “erroneous Western political and legal ideas.”

China’s president Hu Jintao has been conspicuously absent from the public debate.

The outcome of this contest and the extent of its influence on the new five-year plan are especially hard to handicap because this annual meeting marks another stage in the transition to post-Wen, post-Hu leadership. Those two men retire in two years and this meeting is expected to mark another milepost in the elevation of Xi Jinping to leadership. This year Xi is expected to get a seat on the Central Military Commission, a key military appointment so far missing from his resume.

This transition makes it less likely, I think, that China’s leadership will significantly rock the economic and political boats.

The health of the world economy needs China to shift the balance in its economy from manufacturing for export to production of goods and services for the domestic market.

But the most I’m hoping for, given the political transition now underway, is some small steps in the five-year plan in this direction. They won’t be enough to tip the balance of China’s economy but the absence of even a gesture or two would be a dismal indication that China’s economic and political reformers don’t have the clout needed to influence the next set of leaders.

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