The China Analyst

At the Highest Level

As China’s imminent political transition draws nearer, the global economic slowdown is adding some suspense during this once-in-a-decade event. More precisely, China’s policymakers must decide whether to give the economy a more pronounced boost, or bet that existing easing measures are enough to stabilise growth and improve business confidence.

A ‘wrong move’ risks introducing a new Communist Party leadership to the world just as growth falls below the government’s target for the first time in nearly four years. China’s hand-picked, next generation of leaders will be tasked with solving deep-rooted problems formed during China’s 30 years of socio-economic development. A growing (and increasingly visible) disconnect between top wage earners and the working class, frustrated factory owners, and a rapidly-ageing population are just some of the key issues facing modern China.

Despite a slowing economy, the central government has refrained from releasing a decisive (but reform-counterintuitive) fiscal stimulus package as seen in 2008-09. Existing monetary easing measures have yet to reach those hardest hit by a global slowdown – China’s small and medium-sized manufacturers – who are now re-living the same business-threatening conditions experienced during the financial crisis. Preliminary indications point to a seventh straight quarter of slower GDP growth in Q3 2012, pushing back expectations of a growth rebound.

Meanwhile, China’s once-booming property market is still being held in check. Central government leaders have repeatedly pledged that the government will not ease macro-controls designed to cool the property market. At the same time, local governments are growing restless and attempting to take matters into their own hands, with about a dozen local governments unveiling multi-year investment plans worth hundreds of billions of dollars in the past month.

Long term, the stakes are even higher. China is still on track to become the world’s largest economy sometime during the new incoming leadership’s 10-year tenure. If China’s policymakers fail to push push much-needed reforms, foreign investors will look to other markets, and marginalised sections of the population will grow even more restless.

The goal is clear but the road ahead is likely bumpy. Beijing needs to rebalance its economy away from excessive reliance on investment towards a more domestic consumption driven growth model. Beijing will only be able to accomplish this feat through targeted market-oriented reforms such as deepening reforms in the land, labour and financial markets. Yuan appreciation and rising wages will increase households’ spending power – and disproportionately hurt labour-intensive manufacturers – further pushing Chinese manufacturers to move up the value chain and fulfilling China’s greater aspirations. However, the vested interests of China’s powerful SOEs will remain a major hurdle.

The next generation of leaders will have the opportunity to come in and turn things around in 2013 – a hero’s welcome if you will. If China can stay on the course –  while battling increasingly visible signs of strain – it will mark yet another chapter in China’s unrivalled growth story.

In this edition of The China Analyst, we gauge China’s progress in implementing these market-oriented reforms and outline how the country can balance short-term policy easing measures against long-term reform initiatives. We also highlight the country’s budding relationship with Africa as a vital source of growth and as an extension of China’s decade-long ‘going-out’ policy.

I trust our readers will enjoy this edition of The China Analyst, and as always we welcome your feedback.

Kobus van der Wath
Founder & Group Managing Director
The Beijing Axis
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