Challenge for China's new leader is maintaining growth


ASIA BRIEFING:Watching Xi Jinping make his first address as China’s new leader, in the East Room of the Great Hall of the People last week, it was hard not to be struck by the opportunity that his appointment offers to Ireland.

For many years, Ireland’s trade agencies have worked hard to boost the country’s profile in the world’s second biggest economy, despite the fact that our links to China are thin and our size means it is not well known.

Yet China’s new supreme leader not only knows where Ireland is but has also played hurling, visited an Irish farm and is aware of what this State has to offer in terms of access to the euro zone and as an investment opportunity for Chinese firms.

Great as his affection for Ireland may be, it is not likely to be top of his list of priorities right now.

With his elevation to general secretary of the Communist Party of China and chairman of the party’s military commission, Xi has a muscular mandate to rule the world’s most populous country for the next decade.

But China is facing its biggest economic challenges in many years.

In 2002, it trailed the US, Japan, Germany, Britain and France in sixth place among the world’s economies. Research by Frost Sullivan released this month suggests China is set to become the largest economy in the world by 2025. Its gross domestic product is now $7.3 trillion (€5.73 trillion), five times more than when Xi’s predecessor Hu Jintao assumed power. However long-term economic growth is slowing and everyone is wondering what line Xi will take to revive economic growth.

For now he is focusing on the traditional communist notion of “serve the people”. “Our people have an ardent love for life. They wish to have better education, more stable jobs, more income, greater social security, better medical and healthcare, improved housing conditions and a better environment,” he said after his appointment.

“They want their children to have sound growth, have good jobs and lead a more enjoyable life. To meet their desire for a happy life is our mission. It is only hard work that creates all happiness in the world.”

Economic data in the run-up to the leadership transition has taken the edge off the debate about the need for reform. Fourth-quarter GDP growth looks set to be stronger than the third quarter as net exports seem to be recovering.

But few doubt the longer-term need to reform the economy. The hope is that Xi represents more than just a change in style from the Hu/Wen administration, that there will be real, substantial change.

Exports have slowed significantly as the euro zone struggles and the US economy remains sluggish, requiring restructuring of the economy to boost the domestic market. Ways to do this include opening up the state-owned enterprises and allowing small and medium-sized companies to thrive.

Standard Chartered Bank has warned that annual growth could fall to between 3 and 4 per cent within 10 to 15 years without market-driven change to increase competition for state enterprises.

There is also a yawning poverty gap between rich and poor, the social-welfare scheme is weak and China’s financial services industry needs investment and updated regulation. China’s supply of cheap labour is fast disappearing, as is the country’s cost advantage.

There is a certain amount of pressure to introduce policy reforms, including fiscal and monetary reforms, as well as industrial restructuring to stimulate domestic private consumption and shift China’s focus to high value-added and knowledge-intensive industries.

Wang Tao at UBS believes Beijing will concentrate on ensuring recovery now and address 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 per cent. To this end, we expect the current supportive investment and credit policies to stay largely unchanged,” she said.

GDP growth is on track to exceed 7.6 per cent this year, and reach 8 per cent in 2013.

A look at the ruling central committee does not inspire too much confidence that free-market reform will be the order of the day.

While future premier Li Keqiang has experience of the western way of doing business, Zhang Dejiang – who oversees state-owned companies as vice-premier – is an economics graduate of Kim Il-Sung University in North Korea.

Another central committee member Zhang Gaoli oversaw massive growth in Tianjin, using major debt injections.

Despite these less than auspicious signs, there is a broader confidence that Xi will take a more reform-minded route as he has a clear path to do so. Unlike Hu Jintao, he does not have to keep looking over his shoulder at his predecessor.

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