Political leadership transitions typically signal either a change in direction or continuity. However, the mere prospect of such a transition usually postpones many important political decisions and freezes some economic activity, pending the resolution of the accompanying uncertainty.
China’s decennial leadership transition, culminating in the Chinese Communist Party’s 18th Party Congress, is a case in point. While some will remember when a Chinese leadership transition was a political and cultural curiosity that had few direct economic implications for the world’s major powers, those days are long gone.
China is now the world’s second-largest economy and despite a recent slowdown to a 7 percent annual growth in GDP, it is still outperforming all other major players. It remains the vital assembly center of the global supply chain for many manufactured goods, such as computers and mobile phones, enabling lower prices to be offered to the world’s consumers.
That has made China a key trade partner for the US, most European countries and many other economies, in addition to placing it at the center of intra-Asian trade and supply-chain dynamics.
Moreover, China sits on roughly US$3.3 trillion in foreign exchange reserves — much of it in US dollars, but also in other major currencies — owing to its large trade surplus in recent decades. It helps to finance other countries’ trade deficits and domestic investment. Many of its beneficiaries have large budget deficits that decrease national savings to below domestic investment.
Former Chinese leader Deng Xiaoping’s (鄧小平) reforms ignited the most rapid economic growth in human history, and with it the emergence of a large and growing Chinese middle class. That makes China an important market for a broad range of foreign firms, including car producers, technology suppliers, financial institutions, energy companies and agricultural exporters.
Chinese firms — often state-owned — are also seeking greater investment opportunities abroad in major industries, particularly energy.
A by-product of China’s spectacular growth has been rising economic tensions with other countries. China’s exchange-rate policy and its bilateral trade surplus with the US were major issues in the US presidential election, and concerns over Chinese foreign investment are ubiquitous.
The WTO upheld US duties on Chinese tires and Canada has extended its review of China National Offshore Oil Corp’s bid to acquire Nexen, a Canadian oil and gas producer. Despite China’s WTO membership, many foreign companies face restrictions on expanding in China or must cooperate with a local company.
For their part, the Chinese complain about foreign trade practices and are taking some cases (for example, a long-running dispute with the EU over solar panels) to the WTO, where cases brought against China by other countries are proliferating.
However, all sides must bear in mind that China is too important to the global economy and trading system to allow these disputes to spiral out of control.
Meanwhile, China’s economic slowdown — resulting from the weakness in the global economy and efforts to cool the country’s inflation and overheated asset markets — threatens to slow the pace of job creation for the millions moving annually from rural poverty to greater prosperity in China’s expanding urban areas.
It comes at a time when the pace of markets opening and the reduction of state control has slowed, following substantial reforms under former president Jiang Zemin (江澤民) and former premier Zhu Rongji (朱鎔基).
While outgoing President Hu Jintao (胡錦濤) and Premier Wen Jiabao (溫家寶) struck reformist chords in public statements, and in China’s 12th Five-Year Plan, many inside China — reportedly including Jiang — are disappointed.
Thus, Vice President Xi Jinping (習近平) and Vice Premier Li Keqiang (李克強) are being watched closely for signs of what they will do. It is rare for a successor — in business or in government — to usurp a former leader’s lame-duck status by tipping their hand. No one can yet say with any certainty whether the new leadership will push for a reformist leap forward or merely seek to maintain the “status quo.”
In addition to a new president and premier, other members of the Politburo Standing Committee have been named and a vast array of ministerial positions are being filled. With China’s “up or out” system for senior leaders, those who are not promoted will be replaced.
From the new governor of the People’s Bank of China to the Cabinet and leading regulators, the new cohort has an opportunity to move China forward by promoting competition, decreasing the power of state enterprises, boosting household consumption and reducing reliance on exports.
Earlier this year, the China Development Research Center of the State Council and the World Bank issued an excellent report on opportunities for, and challenges to, China’s policy agenda.
They concluded that China should complete its transition to a market economy with land, labor, financial and enterprise reforms.
Opening markets to greater competition and rebalancing the roles of government and markets is the most promising strategy to achieve high-income status in the coming decades. It would be hard to find a better framework for Xi and Li as they put their imprint on China’s economic policy.
In particular, Chinese consumption as a share of GDP is very low by international standards and relative to the historical experience of other countries at a similar stage of development.
Two important options for raising consumption are social insurance — which is developing, but too slowly — and reducing state-owned enterprises’ huge savings by paying dividends to citizens, much as privately owned companies routinely pay dividends to shareholders.
Managers, workers, consumers, investors and governments in every corner of the world — many reeling from their own economic problems — have a lot riding on China’s new leadership navigating reform sensibly, now and in years to come.
The world will soon know more about what to expect.
Michael Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993.
Copyright: Project Syndicate