China’s New Leadership Tasked with Reforming the Economy

on Nov 14, 2012
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The 18th Congress of the Chinese Communist Party came to a “victorious conclusion” today as President Hu Jintao delivered his final speech.

“We are convinced that all the decisions and plans adopted and all the achievements made at the congress, which are of major current and far-reaching historical significance, will play an important role in guiding the all-around development of the great cause of socialism with Chinese characteristics and the great new undertaking of party building,” Mr Hu said in the Great Hall of the People in Beijing, according to the state-run news agency Xinhua.

The members of the Party’s Central Committee and Central Commission for Discipline Inspection were appointed today. The Central Committee will have to meet on Thursday morning to pick a 25-member Politburo, which in turn will select the Standing Committee – the small group at the pinnacle of political power in China.
To fight against the systematic corruption eating the Communist party from within, one of the most senior and capable officials was elected to the Central Commission – Wang Qishan or the Party’s “troubleshooter”.

Mr Qishan was the one to reign in the debt crisis in Guangdong in the 1990s and the person summoned to Beijing in 2003 to deal with an outbreak of SARS disease. Following the 2008 credit crunch, Mr Qishan was credited with drafting the plan that guided China through the stormy economic times. If he is elected as head of the discipline commission many market players will be disappointed as they hoped he would lead efforts for financial-system reforms. Instead he would be placed in the position to fight corruption within the party.

“This is going to be a huge waste of his strength in dealing with economic, financial matters and foreign affairs,” opined Bo Zhiyue, senior research fellow at the National University of Singapore’s East Asia Institute. “He’s a banker who’s going to be in charge of disciplinary affairs. It’s a mismatch between his true talent and his assignment.”

**New Leadership and New Challenges**
!m[](/uploads/story/813/thumbs/pic1_inline.png)It is almost certain that Vice President Xi Jinping will succeed President Hu Jintao as head of the Party and China’s president, while Premier Wen Jiabao is expected to be succeeded by Vice Premier Li Keqiang. It is however unclear whether the Standing Committee of the Politburo will see its members reduced from nine to seven. Such a move could signal the Party’s new leaders’ wish to have an easier time reaching consensus, but it could also constitute an effort to trim the number of positions in China that the Party believes have become too powerful.
Finance Minister Xie Xuren and Commerce Minister Chen Deming were absent from the Communist Party Central Committee named today, suggesting they will most likely not retain their jobs. Liu Hu, a senior government economic adviser, joined the list for the first time, while Governor Zhou Xiaochuan is expected to retire. Mr Zhou, who pushed for a number of reforms including the appreciation of the yuan by 33 percent against the dollar and loosening of controls on lending and deposit rates, will have to be succeeded by someone who can manage the currency and inflation to support a growth rebound but without the luxury of having political independence, such as the one enjoyed by US Fed Chairman Ben Bernanke.
Whoever the new leaders turn out to be, they will inherit a difficult situation. China’s real GDP has declined from a year-on-year pace of 8.9 percent in the fourth quarter of 2011 to 7.4 percent in the third quarter of 2012. Despite recent data of economic recovery, there is no sufficient evidence of a strong rebound. As described by Prime Minister Wen Jiabao, the key challenge ahead of China’s new leadership is the Chinese growth model – “unstable, unbalanced, uncoordinated and ultimately unsustainable”.
The state will have to take the economy through a vital rebalancing – from investment and export-driven growth to a consumption-led model. Beijing has already made some steps in that direction but the fear of further declines in the growth rate has curbed efforts as economic growth remains crucial for the Communistic party with it keeping social unrest at bay.
The direction China takes will have a massive impact on the global economy. If China’s leaders manage to steer the economy away from investment-driven growth, commodity prices will register heavy losses. The rebalancing could also dampen demand for raw materials in general, putting pressure on emerging markets given that China is the major export market for emerging countries.
China’s pollution problem has also become a growing threat to economic growth and to human health – the topic became widly discussed at this year’s congress, partly because of the social unrest caused by environmental degradation. According to the Financial Times, Environmental Minister Zhou Shengxian pointed out that environmental policies were closely tied to the efforts to rebalance the economy away from the highly polluting heavy industries and towards sectors delivering slower, more sustainable growth.
“Talking about the environment without an economic perspective is like catching fish on a tree,” Mr Zhou said during a press conference. “And pursuing economic development without environmental protection is like draining all the water out of a pond to catch the fish.”

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