Tag Archives: Wen Jiabao

Reading The Runes Of China’s Economic Reform

After 10 years managing China’s economy, prime minister Wen Jiabao has become a dab hand at under promising and over delivering. As a parting gift for his successor, Li Keqiang, he has passed on the first half of that formula, a GDP growth target of 7.5% for this year, and put a bow on it by saying it will be hard to attain.

Up to a point. China’s growth rate has stabilized after last year’s slowdown. GDP growth should come in closer to 8% than 7.5% for 2012 and edge above 8% this year. The IMF, for one, is estimating 7.8% growth in 2012 and projects 8.2% growth for 2013.

What Wen is also signaling, and has been for some years, is that China’s three decades of double-digit annual growth is over. As with Japan and South Korea before it, the country’s rapid-growth industrialization has run its course. Sustaining growth over its next phase of development demands market-oriented structural reforms and a rebalancing of the economy away from state-driven investment and more towards private consumption.

In the immediate future, investment will continue to power growth. It is policymakers’ fall back position when the economy needs stimulating, and can be done without having to take on deeply entrenched vested interests as both structural reform and rebalancing require.

How far and fast the new leadership can push ahead with those longer-term changes depends on the factional balance of power at the top of the Party. The outcome of the National People’s Congress currently being held in Beijing should provide clues via new government appointments. ministry realignments  and policy pronouncements as to how that falls, and thus the scale of the changes the new leadership feels able to take on.

The policy program will doubtless be ambitious, but it is the timetable that is critical. So is the policy effort that will be devoted to issues such as corruption, urbanization, local government governance, pollution and food and product safety. They all have economic consequences, but even more importantly potential impact on the Party’s legitimacy to rule.

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Wen’s Words Buck Up China’s Slowing Economy

Avuncular Uncle Wen is always the man to send to uplift spirits and spread reassurance when natural disaster strikes or times are trying. This week, China’s prime minister has been dispatched to his home turf, the economy, which has just reported its seventh consecutive quarter of slowing year-on-year GDP growth at 7.4% in the third quarter. And he is at his most upbeat. He says the slowdown has stabilized, and the official target of 7.5% annual growth for the full year will be achieved.

When it was first announced in March that target seemed a ridiculous low-ball of a number, one that would be easily exceeded so that the outgoing leadership could hand over to their successors on a high note, at least as far as the economy went, and particularly in comparison with the ailing developed economies. But the managed slowdown in domestic investment, aka deflating the property bubble and stopping the local government debt bomb from exploding, has been exacerbated by the drop in demand from China’s export markets, and especially from its largest, crisis-wracked Europe. Policymakers have had to walk a fine line between stimulating the economy sufficiently to prevent growth slipping irrecoverably below the official target and reigniting the inflation they struggled so long to bring down. At the same time, they had to avoid inadvertently lighting any fuses close to the banks’ loan books.

Yet Wen is all public cheer: “Exports have gradually recovered, consumption has grown steadily, price inflation has clearly receded, the job market has been very good,” he said in a statement published just ahead of the announcement of the third-quarter GDP number. There are monthly numbers to back him up. Exports rose 9.9% year-on-year in September, while inflation dipped to 1.9%, well down from last year’s peak of 6.5%. Retail sales were up 14.2%. This Bystander is always wary that one month’s number is no guarantee of the performance of the next one, though we don’t doubt that the 7.5% growth target for the year will be met, by hook or by crook. But Wen looks likely to over-deliver by as little as it is now clear he under-promised.

Wen also pointed out in his statement that the government “had taken new steps towards structural transformation.” As to whether he has pushed the economy fast enough down the road to rebalancing and far enough so his successors won’t turn back, we’ll leave for another day.

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Cautious Optimism About China’s Economy

Prime Minister Wen Jiabao weighed his words carefully earlier this week. While on an inspection tour of Zhejiang, he sought to strike a balance between being realistic about the current situation and optimistic ahead of the imminent leadership transition. China’s economy continues to be buffeted by the global economy, particularly the eurozone crisis, he said, but signs of an end to the slowdown in growth are there to be seen.

China's real GDP growth, % change, annual

China’s annual real GDP growth, % change. Source: World Bank

That slowdown has been more prolonged than China’s economic planners expected. As the chart to the left shows, the days of double-digit annual economic growth are receding into memory. They would have anyway, given the stage of the country’s economic development, but the global economy has provided extra drag.

The official target for real GDP growth this year is 7.5%. (We have made that the baseline on our chart.) Originally set as a low-ball target, as is the leadership’s custom on the principle of under-promise and over-deliver, the final outcome will be closer to it than at first intended. Making sure it is hit, and the feared “hard landing” avoided, has become the policy priority. Monetary policy has been eased. Tax breaks given. Interest rate cuts, two and modest, have been made. Infrastructure investment spending has been brought forward. Every effort is being made, though, not to re-inflate the property bubble which, with its attendant potential bad bank lending risks, Beijing has been letting down so carefully.

The success of another economic battle that lasted longer than expected, against inflation, gives policymakers scope to tweak domestic demand with further administrative easing. Further significant cuts in interest rates are unlikely, we believe. June and July’s rate cuts also experimented with rate liberalization. Officials will want to give themselves as much time as possible to assess the effects of that change, a change that the reformers among their ranks want to make on a grander scale. No crisis is too bad to be wasted.

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China’s Stimulus Spending Back On Track

Under the Blue Sky train Luo Chunxiao photo
Subways, railways and bridges. That is what China’s latest growth-restoring stimulus spending will look like for the most part. The railways ministry says it plans to spend 470 billion yuan ($75 billion) on lines and bridges this year, 14% more than last year, when spending was still depressed in the wake of the continuing corruption investigations that have dogged the ministry since its former minister, Liu Zhijun, was brought low on graft charges in 2011.

The new spending goal is also a tad higher than the annual spending figure mentioned early in July, 461 billion yuan, a sign that the government thinks the slow down in growth hasn’t yet bottomed out. The latest figure, and news of 27 billion yuan of bond issues to help finance it, followed a meeting of the State Council to discuss the economy. It is still well short of the 700 billion yuan the ministry spent in 2010. Beijing would also like some private investment in the system, and in the utilities, energy, telecommunications, financial, health and education industries.

Meanwhile, 28 cities have plans to build or extend subway systems by 2015, at a total cost of 1 trillion yuan. That is a potential addition to the local government debt bomb that should raise some eyebrows at the very least. Nor is running a subway system once built necessarily cheap. But that is a problem for tomorrow. Today’s priority, as Prime Minister Wen Jiabao repeated this week, is growth. Not that that makes tomorrow’s problems go away.

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Goldilocks Wen

It was the pro-growth comments that Prime Minister Wen Jiabao made during his weekend visit to Wuhan that caught the headlines. As national reassurer-in-chief at times of adversity, Wen could be expected to raise spirits in the face of a slowing economy. But to hear him say it, economic policy won’t be too hot or too cold, but just right:

We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth.

Or, to put it another way:

The country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations.

Or, as state media summarized it:

Central government will continue to strengthen and improve macro control efforts, carry out timely and appropriate anticipatory adjustments and fine-tuning, boost domestic consumption and stabilize external demand to promote steady and relatively fast economic growth.

Just perfect.

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Breaking Up China’s Big Banks

Every leading nation’s big banks wield political clout. China’s, being state-owned and run by big political players in their own right, sit more easily at the center of power than most. They see it as their rightful place. Both they and the government see their role as providing conduits of national policy. Administrative guidance to the banks sets the course for their customers in business and industry in the cause of economic growth, be that slowing inflation, deflating bubbles or stimulating growth. So when Prime Minister Wen Jiabao says the big banks’ monopoly needs to be broken as they make easy money for themselves while denying loans to cash-strapped small and medium-sized enterprises he needs to be assured that he is safe in rattling such powerful cages and that the need to do so is urgent.

In the words of the song, breaking up is hard to do. Yet Wen’s words at least get the idea on the table and add to the determined thrust by the economic reformers to use the leadership transition now underway to revitalize near moribund financial reform. Wen again pointed to the pilot scheme in Wenzhou to create alternative financing channels for small and medium-sized enterprises in the city that have hitherto been forced into the usurious shadow banking system. This is being seen by some as an experiment that if successful will be expanded more broadly as a necessary underpinning of the rebalancing of the economy towards domestic demand.

The prime minister’s words came as regulators further opened capital markets to foreign investors. That, though, is politically easier to do than taking on the big banks, large redoubts of vested interests that they are. The opportunity to do so may lie in the slowing economy turning more bank loans sour. Government has had to step in once before to clean up the state-owned banks’ balance sheets. The price for doing so again could be more conditional. And might it even include the big banks improving their rudimentary credit-risk analysis? A bit more competition wouldn’t go amiss in that regard, while plenty of entrepreneurs would be happy to have their creditworthiness judged on their business prospects rather than their political connections.

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Bo’s Sacking Doesn’t Free China Of Its Leadership Dilemma

The sacking of Bo Xilai as Party boss in Chongqing brings a spectacular halt to his political career, regardless of what has physically happened to him now, still unknown. Bo’s hoped of promotion to the top rung of the party when it changes its leadership later this year had been on the line since last month when his former close ally, Chongqing’s former police chief, Wang Lijun, tried to defect to the U.S. Wang is currently under investigation and has now been sacked as Chongqing’s vice-mayor, too. Bo may well now follow him in falling under investigation.

Wang’s was the iron fist that cracked down on organized crime and on businessmen and local officials accused of being corrupt by Bo’s administration in Chongqing, which was also marked by its prominent use of nostalgic Maoist era ‘red’ propaganda. The high-profile, popularist Bo was seen as a figurehead for the faction within the Party that wanted to revert to more traditional political means of asserting the Party’s legitimacy to rule. Wang Yang, the Guangdong party chief, is seen as representing the faction leaning towards more economic and political openness. The two men were seen as rivals for promotion to the Politburo’s standing committee, the inner sanctum of the Party’s leadership, later this year. How Bo’s sacking affects that ideological divide, beyond the obvious implications that he himself is gone for now, will take some time to become clear–not that that will stop the speculation.

The factional fault lines within the Party are complex, even within the princelings, the elite collective dynasty of some 400 families descended from Mao’s revolutionary leaders that holds extensive sway over the Party, government, business and the military. Factional alliances exist among those who want to develop a more harmonious form of capitalism with a strong safety net, a narrowing of the wealth gap and more environmental protections; harder line economic reformers who want to diminish the power of the public sector and open up political reforms to embrace a new propertied class; the so-called neo-comms, who want to asset China’s global power through cultural diplomacy, military strength and taking a greater role in international institutions; and some deeply entrenched vested interests who see themselves losing from any change.

Speaking at a press conference after the conclusion of the annual parliamentary session, but at a time when the decision to sack Bo would have been made, Prime Minister Wen Jiabao said that “the Chongqing authorities must seriously reflect on and draw lessons from the Wang Lijun incident”. Wen also said that China needed not only economic reform but also political structural reform, especially the reform of the leadership system of the Party and the government, warning of another Cultural Revolution if they did not happen. Wen has often spoken of the need for such political reform. He has not publicly warned in such dramatic terms of the consequences of failing to undertake it. That gave plenty of scope to those who speculated that the factional differences within the upper echelons of the Party were deeper than had been thought. And it reinforces our view that the Party faces its most important leadership transition in the three decades since Deng Xioaping set it and China on the road of economic reform.

The dilemma is this: If the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and the country stronger, and if China’s rapid economic growth cannot continue beyond a certain point without institutional reform, as economic history suggests, then managing the role of government in the economy and overcoming state-owned vested interests–in other words reforming itself–becomes the new leadership’s most important concern.

If, however, the Party’s legitimacy to monopolistic rule rests on an ideological footing, the mandate of Mao, it will still need to forge a statist economy that can deliver the economic development to ensure social stability and regional clout, and gamble it can defy economic history by becoming the world’s first developed economy and single-party state. So, again, managing the role of government in the economy but arbitrating between state-owned vested interests becomes the new leadership’s most important concern, and one made more complex by having to operate against a back-drop of a globally connected economy in a world that is already wary of China’s perceived mercantilism, rising power and status.

Who now gets promoted from the Politburo to its standing committee, and how they rank, will reveal to some extent how that great divide liea, and thus how China develops over the next decisive decade. Bo’s sacking tilts the scale towards the economic reforms, but it would be a fool who thought that the scale had tipped decisively. And it would also be wise to remember that all those jockeying for position are united in preserving the Party’s grip on power.

Footnote: Zhang Dejiang, a vice-premier and Politburo veteran who is a North Korea expert and has a reputation for maintaining strict social stability, takes over from Bo in Chongqing. He was Party secretary in Guangdong from 2002 to 2007, taking over just before the SARS outbreak and was criticized for his tardy response to the epidemic.

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