News Analysis: Election Year

China’s economy is in good form going into 2012, and with a change of leadership in the top ranks of the communist party, it is imperative it stays that way, writes Willy Lam.

 
China’s just-released economic figures for 2011 showed that predictions of a hard landing were either misguided or premature. The economy grew year on year by 9.2 percent. While this was a shade lower than the comparable 2010 figure of 10.4 percent, indications are that the leadership under President Hu Jintao is pulling out all the stops to ensure that the GDP will expand by 8 percent to 8.5 percent in 2012.
 
The relevant question to ask about the Chinese economy is not whether the Chinese Communist Party (CCP) leadership can maintain a relatively high GDP clip; it is whether such growth is beneficial for the country in the long run – and at what price.
 
There are special reasons why a high growth rate is a must for 2012. This is the last year of the administration under President Hu and Premier Wen Jiabao. Both Hu and Wen will retire from the ruling CCP Politburo Standing Committee (PBSC) at the 18th CCP Congress scheduled for October 2012. A satisfactory economic performance will ensure that protégés recommended by Hu, Wen and their colleagues can smoothly be inducted to the new PBSC – China’s inner sanctum of power – at the pivotal Congress.
 
Then there is the spectre of large-scale social upheaval caused by unemployment. Government economists admit that the country requires a growth rate of 7 percent to 8 percent to generate 15 million to 20 million new jobs a year – a “minimum threshold” for safeguarding socio-political stability.
 
The employment front this year could be as difficult as that of 2008, the first year of the global financial crisis. Millions of blue-collar jobs which are dependent on exports to Europe and the U.S. may be gone as orders are being curtailed. Then there is the relentless growth of wages as well as land, electricity and transportation costs in China. Thousands of factories in the “World Factory” – which are owned by both foreign and domestic-Chinese owners – are moving to low-cost manufacturing hubs in Sri Lanka, Bangladesh, Vietnam, Thailand and even several African countries.
 
Soon after the fall of Lehman Brothers, Premier Wen introduced in November 2008 a 4 trillion yuan package of mostly government cash injections in infrastructure and other types of fixed-assets investments to try to reflate the economy.
 
While this extraordinary move succeeded in jacking up the growth rate in 2009 and 2010, the costs were also heavy. Inflation reared its ugly head in 2010 and early 2011.

Moreover, a lot of the investments in infrastructure turned out to have dubious results. Take the ultra-ambitious scheme to build the world’s most extensive high-speed train network. China’s bullet train program is now burdened with close to 2 trillion yuan in debt; and economists reckon that it will take several decades for the government to recover the initial investments. There are similar problems with the on-going spree to construct subway systems in even medium-sized cities.

 
To ensure relatively high growth in 2012, the central leadership last autumn already switched the priority of macro-economic policy from fighting inflation to facilitating GDP expansion. For example, the “loan target” for 2012 – the extent of credit that Chinese banks are allowed to extend to domestic enterprises – has been fixed at 8 trillion yuan, or 0.5 trillion yuan more than that of 2011. And the M2 money-supply growth rate has been set at 14 percent compared to 13.5 percent the year before.
 
However, given the apparent mistakes the Hu-Wen leadership has made in fostering a Great Leap Forward-style expansion of the high-speed train and subway systems, it is doubtful whether more spending on infrastructure ???????? ?????? schemes makes economic sense. The same is true for over-investment in the real-estate sector. Housing prices are coming down. However, because of excessive speculation in the past five years or so, apartments in the big cities are still too expensive for even professionanls with high-paying jobs.
 
Chinese economists agree that the leadership should try to achieve growth by encouraging domestic consumption and through productivity gains to be derived from indigenous innovation. Household consumption has remained at the low level of 34 percent of GDP, down from more than 50 percent in the 1980s. A key factor that is depressing consumer spending is that the bulk of the wealth created by China’s “economic miracle” the past two decades has either gone into state coffers or been reaped by monopolistic, state-owned enterprise groupings. Workers’ salaries as a proportion of GDP have slipped by around 1 percent annually for the past decade.
 
On the surface, China’s technological innovation seems to keep dazzling. Engineers have produced the world’s fastest computer as well as put a semi-permanent laboratory in outer space. However, just as in the former Soviet Union, the bulk of Chinese technological breakthroughs emanate from close cooperation between state-owned industries and the military establishment.
 
The great majority of the core technologies used in the Pearl River Delta and the Great Shanghai Region still have to be imported from the U.S., Europe, Japan or South Korea. And while China boasts the world’s largest contingent of scientists and engineers – some 55 million – they have yet to produce the type of cutting-edge consumer products on which the economies of Japan and South Korea depend.
 
The year 2012, however, is the equivalent of an “election year” in China. Most members of China’s political elite are obsessed with just one thing: ensuring that affiliates from their own factions can get into the ruling Central Committee and the Politburo at the 18th CCP Congress. Crucial questions about how best to restructure and rationalize economic growth may have to be left to the post-2012 administration under the new Fifth-Generation leadership. 
 

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