Given its 300 sunny days per year, India is ideally situated for solar power and the largest solar u...
Times and Faces Change in China
11/19/2012 8:30 am EST
A leadership shift puts Xi Jinping at the head of the Communist Party as China reckons with its economic destiny, writes Clifford Coonan of The National.
Xi Jinping was last week given a powerful mandate to rule the world's most populous country for the next decade.
Using that power to keep China's economy on track will be one of his most pressing concerns. And, not surprisingly, there are plans in place.
"The policy directions to address the key economic and social challenges have already been laid out in the 12th five-year plan and reaffirmed in president Hu Jintao's report at the party congress," says Wang Tao, an analyst at UBS.
Xi is the new general secretary of the Communist Party of China and the chairman of the party's military commission.
He takes over the helm of an economic colossus. China's GDP is $7.3 trillion, five times more than ten years ago, putting it second behind the United States. In 2002, it trailed the US, Japan, Germany, Britain, and France in sixth place.
Growth is slowing this year, prompting market players, analysts, overseas companies and ordinary people alike to wonder what Xi plans to do to maintain the country's monumental development.
Improving economic data in the run-up to the leadership transition took some of the urgency out of the debate about the need for reform, which could prove a double-edged sword for China's long-term prospects. Fourth-quarter GDP growth looks set to be stronger than the third quarter, as net exports seem to be recovering.
But longer term, the consensus is that restructuring the economy is necessary. China's growth miracle was built on the export market, which has slowed dramatically as the Eurozone struggles and the US remains sluggish.
There is a need to redesign the economy to boost the domestic market, which requires opening up state-owned enterprises and small and medium-sized companies to advance.
There is also a yawning financial gap between the very rich and the very poor, no significant social welfare system, and a hugely underdeveloped financial services industry.
Per-capita GDP has also increased five times from $1,000 to $5,500 since 2002, meaning China's supply of cheap labor, which once looked inexhaustible, is fast disappearing, as is the country's cost advantage.
GDP growth is on track to exceed 7.6% this year, and reach 8% next year, the trade surplus is set to rise visibly from last year, and investment is likely to outpace consumption in the next few quarters, says Wang.
That means the government is likely to focus on ensuring recovery now and deal with imbalances over time.
"We expect the government to address the issues of structural imbalance gradually in the coming years. In the next year, the immediate priority will likely remain keeping growth at a relatively rapid rate of at least 7.5%. To this end, we expect the current supportive investment and credit policies to stay largely unchanged," she says.
Other personnel changes in recent days have the financial markets asking questions, such as what policy effect will follow the replacement of the central People's Bank governor Zhou Xiaochuan, who lost his place on the Communist Party's 200-member central committee.|pagebreak|
Mark Williams at Capital Economics says he does not foresee policy changes in the near term. "The second of Zhou's five-year terms ends next year and he was expected to retire. His successor's ability to stamp his views on the central bank will be severely curtailed. Monetary and currency policy decisions are taken at more senior levels of government," he says.
"As it happens, we expect the gradual interest rate liberalization of the past year to be sustained, and for the renminbi to strengthen slowly over the couple of years ahead. Given the stronger tone of recent economic data, pressure to ease policy has eased."
Wang Qing, a professor of marketing and innovation at Warwick Business School, has advised the Chinese government on how to stimulate domestic consumption. She believes Xi will not introduce radical changes.
"He will continue the Communist Party's focus on stability and growing the economy, as he will want to show he has the ability to build on the past," she says. "The goal that unites everybody in China is still economical, that is to take the top spot in GDP in the world.
"The country's middle class and urban population is rapidly growing, and they demand high-quality, premium products and services. The export-led model of development is no longer viable. As recent figures show, 9.5% of China's GDP growth in 2011 came from domestic demand and only 0.8% came from net exports," says Wang.
This means one task facing Xi will be introducing a round of policy reforms, ranging from fiscal to monetary to industrial restructuring, to stimulating domestic private consumption, and shifting its focus to high value0added and knowledge-intensive industries.
"While the Chinese Communist Party created an economic miracle, at the same time they also destroyed old safety nets for many workers under the planned economy," says Wang.
"When the economy was growing at double digits in the past two decades, the problem was not as acute as when the economy is slowing down as it is now. The new leaders now have to face up to these problems, which the old leaders managed to avoid."
Duncan Innes Ker, a senior economist at the Economist Intelligence Unit, says the new leadership is certainly a change of style, but not of substance.
"We are much less optimistic about the prospects for significant reform of the state-owned enterprise sector now that the top leadership has been unveiled," he says.
"Although Li Keqiang [China's new premier] has flagged this up as an important goal, the inclusion of Zhang Gaoli and Yu Zhengsheng on the politburo standing committee tilts the balance of power towards those favoring state-led development.
"Both come from cities [Tianjin and Shanghai respectively] whose economic development has been driven by big state-owned firms and government projects," Innes Ker says. "The conservative tilt of the new leadership is stronger than we had assumed it would be."
"While this is not likely to affect the outlook for the next year or two, we will be looking to revise down our growth forecasts for the medium term, as the reforms necessary to support productivity growth over the longer term now look less likely."]
Related Articles on GLOBAL
China weakness, geopolitical risk & the U.S. Government shutdown are all weighing on U.S. econom...
Algonquin Power & Utilities (AQN) is beloved by Canadian analysts because of a border hop side-e...
Value vs. growth style for 2019? Regardless of which style you believe will be the winner in the nex...