Economy the biggest challenge for China's new leader

ASIA BRIEFING:Thursday sees the start of the 18th Communist Party Congress at which China's next generation of leaders will be appointed. The press pack for the event includes a baseball cap and a smart backpack, a sign of just how slick things have become in China over the past few years.

The headline event will be the start of the leadership transition itself. Vice President Xi Jinping, who visited Ireland earlier this year, will be appointed as general secretary of the party, succeeding President Hu Jintao, while Vice Premier Li Keqiang will likely replace outgoing Premier Wen Jiabao.

The biggest challenge Mr Xi will face when he takes over office will be implementing drastic reform of China’s economy, transforming it from an export-led economy with increasingly high labour and energy costs, as well as a worsening environment, into an economy where domestic demand is an engine for expansion and where innovation is encouraged.

China’s economic expansion slowed for the seventh successive quarter in the third quarter, but there have been tentative signs the worst slump since the global financial crisis was bottoming out, including data which seemed to show that manufacturing has at least stabilised.

Analysts expect data next week to show that the economy is on track for a recovery.

But it’s a modest recovery. UBS forecasts that the Chinese economy will grow by 7.8 per cent this year, and the World Bank warns that unless China commits to change, annual growth could sink to five per cent by 2015.

There are 300 million migrant workers, many trying to find their way in the cities and on the wrong side of a gaping wealth gap that gets worse every year.

The country is growing more slowly that it has for many years, and there is widespread belief that kickstarting growth is going to require some ambitious planning and solutions, including some tough reforms.

These include finding ways of cutting back the State Owned Enterprises (SOEs) that dominate economic life in China.

And diplomats say that various state think tanks have also been asked to find ways to free up the setting of interest rates and making the yuan currency more convertible internationally, as well as freeing up state control of land and basic resources.

The leadership is also under greater scrutiny than ever before.

The leader making the most strident calls for reform is the outgoing premier, Wen Jiabao, but he has been embarrassed by a New York Times report of his alleged family business ventures, which has spread throughout the Chinese online network.

Something similar has happened to Xi Jinping, after a Bloomberg story earlier this year about his family’s holdings.

There is a lot of back and forth right now among the China watching community about who will make up the nine-person standing committee that runs everything in the country, and whether it will be expanded or trimming back, but most are more concerned with the overall state of the body than with the details.

“The identities of committee members probably matter less than whether they are collectively able and willing to push through necessary reform,” said Mark Williams Qinwei Wang in a research note from Capital Economics.

“That said, there are a couple of developments to look out for. One is

how much authority Wang Qishan has over economic and financial matters. The other is whether Li Yuanchao and Wang Yang make it onto the committee.

“Li had long been presumed to be one of the strongest contenders. If he is not chosen, this will be seen as a step back for reform hopes. Conversely, if Wang Yang is selected despite his relative youth, this would arguably be a step forwards,” they said.

The government has been told by its advisers to focus on building up the service industries and consumer spending, shifting away from reliance on exports and investment.