China's policy directions under the 5th-generation leadership
Updated: 2012-12-22 07:28
By Richard Harris(HK Edition)
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Despite the assembled multitudes of observers looking at the new Chinese State leaders, we are a little further ahead in discerning where political and economic policy is going to go in China over the next few years. There are many analysts reading the few tea leaves - but even the number of members on the Politburo Standing Committee was not known until they came out on stage at the 18th CPC National Congress on Nov 15.
The two key members, Xi Jinping and Li Keqiang, are both just under 60. The others range from 64 to 67. In five years at the next Party congress, five will be over the retirement age (which is nominally 65) and are likely to be off stage, probably. Xi and Li are now No 1 and No 2 in the top leadership. It is their policies that will be executed through to 2022.
Xi recently gave a speech emphasizing industrialization, application of technology, urbanization and agricultural modernization. We observers like to read in too much about economic reform and the environment because they are on our wish list.
The 18th CPC National Congress did highlight two particular issues of concern. The first was the wealth gap or the difference between the rich and the poor. It is the disparity of wealth that creates discontent, not the absolute level. The CPC is well aware that power comes from the people and the move to drive wealth downwards through increasing minimum wages and consumer friendly policies is certain to continue.
The most surprising announcement was not that the CPC wishes to eradicate corruption, which it now freely admits is rampant - but that it admitted that it might cause the "collapse" of the party. This is the word that dare not speak its name. It was therefore a surprise to hear such tones used.
There have been many campaigns against corruption, but if the price of failure is now seen publicly to be the collapse of the CPC, then this one will be more serious. The overriding aim of the CCP is to stay in power. Wang Qishan (age 64), whose job has the wide-ranging portfolio title of "Discipline", has the future of the Party on his shoulders.
And what a period we have before us. The stock market has fallen for an unparalleled four years. China's main export markets are in distress. The desperate expansion policies of 2008 led to overinvestment and wastage so the inefficient use of this investment has to be digested. Inflation on the ground is 10 percent; and companies are typically budgeting for staff pay rises of 15 percent in 2013, with foreign companies budgeting 20 percent as the RMB is expected to continue to appreciate. (Memo: the official Chinese inflation figure in the last month was published as 1.7 percent per annum.)
The housing bubble, unsustainable local government debt, lazy management practices in the good times that have worsened the position of the exporters in the bad times, increased protectionism, the global debt overhang/crushing in Europe, the fiscal cliff slowing down the US economy and currency pressures are the economic issues facing the new State leaders today. There is not much on the positive side except the ambition and industriousness of the Chinese people.
We cannot yet predict how the fifth-generation leaders will handle it, but we do know that unless reform is imposed by the leadership, then reform will be thrust upon the leadership. This is simple economics, impacting both control or market economies where inefficient use of capital and difficult trading conditions eventually overwhelm - as it did in Russia. China has relied on the rest of the world for too long, and now that the world is letting them down, China must develop its domestic economy faster than ever before.
Looking to the future - for it will take six months for the government to get back to normal - we need to observe indicators to see where the policy reform in China will be going.
The government will look to narrow the wealth gap most likely by maintaining high increases in the minimum wage, which has been rising often at 20 percent per annum and up to 40 percent a few years ago. The removal of the despised hukou, the residential hometown status that every Chinese person requires to claim education and health benefits, will reposition the status of the 250 million migrant workers in China, reducing exploitation and reinvigorating labor.
Family support measures through the extensive welfare system may continue to be increased. Housing restrictions that choked the 2010-1011 bubble in house prices (which had caused hundred of thousands of dark empty flats across the country) are likely to remain. A fairer society under the law, not just for the rich and powerful is coming - the blogosphere demands it - judging from the recent handling of embarrassing abuse of power cases. Internal security, which by some measures costs the Chinese government more than the national defence bill, cannot get any tighter without damaging the economy and must be relaxed.
The battle against corruption, having been such a high profile target in the 18th Party congress, must continue. Detection is not difficult and convictions will have to increase for the government to maintain its credibility. The laws and penalties are already strict but often unenforced. The people need to feel that this is being applied evenly and not as a result of a turf battle.
Supply side economic reforms will also help to mitigate corruption. Monopolies, regulation and control breed corruption. The State-owned enterprises and their cosy relationships with the banks encourage an inefficient distribution of capital. Any signs of change here will give us fuel for predicting policy. This might be combined with an extension of the support for entrepreneurial ventures or private capital, preferably carried out through the tax system as direct support breeds corruption. The liberal use of business expenses for personal enjoyment is also corrupt, while being good for the Macao gaming industry.
Supply side reform cannot happen without an element of deregulation, the breaking up of large entities and indeed some limited privatization. The big Chinese reforms came when private enterprise was allowed to grow organically. Now the private sector and the domestic market must grow through privatization.
China's Achilles heel is that it is highly dependent on the world economy - the US in contrast is perhaps the least dependent, the treasury market aside. The Western view of China is as a low consumption economy, but this is quite wrong. The Chinese want to consume madly and need no encouragement, just a little disposable income. It is quite impossible to find a seat in Starbucks or Macdonald's in Beijing on a Sunday. Further growth in the service and retail industries might well be encouraged, as indeed the provision of consumer goods in China in the early days was so beneficial to the population.
On the demand side, it is likely that the Chinese will continue to spend on infrastructure. Despite poor quality construction, the huge network of first-class road and rail lines have been of great benefit to the economy, despite the wastage in some areas. The country will grow into these resources.
Measures on the environment are usually on the foreigners' wish list for China, but are unlikely to happen quickly. The biggest spur will again come from the people. Pulmonary diseases will become an increasing burden on the population because of the extraordinary levels of pollution (often 8 to 10 times over WHO safe limits) and the widespread habit of smoking. News about environmental enforcement will be closely watched.
Perhaps the biggest indicator of all will be how China handles the value of the RMB against the US dollar. Recent moves in the controlled interest rate have been to increase the value of the currency, making 2012 likely to be a 3-5 percent year, after a 3-5 percent year last year. This appreciation is likely to continue.
The Chinese do not wish to hurt their exporters but a gradual increase in RMB value has key benefits. Inflation can be exported to everyone else with limited impact on demand because the huge industrial base that feeds so much of the world with manufactured goods cannot be moved. A strong currency is a major tool of foreign policy. A country can print its appreciating currency to buy foreign assets and influence. The world wants RMB - it will soon need a new currency safe haven out of the yen.
While the US is the most independent economy on the Earth and will continue to dominate, China's development will have an increasing influence. The fifth-generation leaders will have a big task in moving China from a teenager who does not know its own strength to a young adult - with an appreciation of statesmanship and its own position in the world. There will be plenty of chances for clever observers to read the tea leaves in the next six months.
The author is chief executive of Port Shelter Investment Management.
(HK Edition 12/22/2012 page3)