Expect economic reforms to accelerate in China in the coming
five to 10 years, propelling a shift to domestic consumption as
the driver of growth rather than exports, but dont get
your hopes high for political reforms.
Thats the consensus of many China experts who observed
the Communist Partys 18th Party Congress, which closed
this week with the selection of Xi Jinping as the successor to
Hu Jintao as general secretary, and six other leaders who will
rule the worlds second-largest economy.
Joining Xi, the 59-year-old son of a Communist
revolutionary, will be Li Keqiang, 57, the current vice
premier. The two men will take over the reins of government in
March after their formal appointments by the National People's
Congress, with Xi succeeding Hu as president and Li taking over
from Wen Jiabao as premier.
Xi earned a bachelors degree in chemical engineering
and a doctorate in Marxist theory from Beijings
prestigious Tsinghua University, Chinas equivalent to the
Massachusetts Institute of Technology. Li, who holds a law
degree and a doctorate in economics from Peking University,
will become the first Chinese premier who was educated in
economics. Previous premiers have tended to come from
The party also picked five others who will join the two on
the Politburo Standing Committee, the nations ruling
council: Chongqing party chief Zhang Dejiang, 65; Shanghai
party chief Yu Zhengsheng, 67; Tianjin party chief Zhang Gaoli,
65; party propaganda chief Liu Yunshan, 65; and Vice Premier
Wang Qishan, 64, who is also the nations economic tsar.
The new committee has two fewer members than the previous
nine-member group, which analysts believe should foster
consensus building and facilitate decision making.
Except for former journalist Liu, the others served as
provincial leaders over the course of their careers and are
known for being economically liberal but politically
Their selection was the result of more than five years of
back room maneuvers between the various factions of the party.
Chief among them the sons of revolutionary leaders known as the
princelings, such as Xi; younger officials who are
members of party Youth League, like Li; and those who come from
the Shanghai faction led by retired president Jiang
Zemin, 86, who comes from Shanghai and remains a powerful
Several political reformers who were regarded as top
candidates were not selected. They include party organization
chief Li Yuanchao, Guangdong party chief Wang Yang and United
Front party chief Liu Yandong, the only woman among the
Analysts expect the new leadership to push through economic
and financial reforms now that the political uncertainty is
over. Many local authorities have waited on the sidelines and
have not implemented economic policies announced with the last
Five-year Plan, which was passed by National Peoples
Congress in 2011. The plan incorporates a raft of economic
reforms that allocate more resources to private enterprise and
to inland provinces and accelerate the building of a national
social safety net.
I believe the conclusion to this contest will remove
the political uncertainty that has been holding back the
markets, says Hong Kongbased Martha Wang, who
manages $3.7 billion at the Fidelity China Focus Fund. We
will also see a pickup in the implementation of the Five-year
Plan. Furthermore, I think the new leadership will be willing
to accept lower GDP growth as it will focus on quality rather
than quantity of GDP growth. Such a shift aims to
reorient the economy to reduce its dependence on exports and
encourage more domestic consumption, analysts say.
On top of the financial reform agenda are renminbi
convertibility, banking reforms that allow banks to set their
own competitive interest rates and increase lending to the
private sector, and allowing local governments to issue their
Frank Yao, vice chairman of Asia at Neuberger Berman, says
he expects economic reforms will take place at a measured pace.
China is a big country now, Yao says. Many
people have put very high expectations on the new leadership.
However, it will still take some time for reforms to take
Take, for instance, interest rate liberalization. Chinese
banks have traditionally followed interest rates set by the
central bank. Reforms introduced in recent months have given
banks some modest leeway to vary deposit and lending rates.
Under consideration are reforms that will allow banks greater
freedom to set their own rates based on market demand.
Credit markets still are dominated by commercial banks,
and on the corporate side it is still really slow for bond
issues, Yao says. Building credit markets with deep
liquidity will take time at least two to three
Yao notes that the purge of Bo Xilai, who was Chongqing
party chief until earlier this year, caught many people by
surprise and indicated that politics in China still remained
Bo, who is awaiting trial, allegedly tried to cover up
crimes by him and his family. His wife Bo Gu Kailai was
sentenced to death with a two-year reprieve for murdering a
China experts believe the real reason for Bos
expulsion from the Chongqing party is because he openly
challenged the succession plan and lost a power struggle with
President Hu and party elders, including former President
Though China may not reform politically any time soon, its
leaders know very well they must accelerate economic reforms
sooner rather than later.
The IMF forecasts Chinas economy will grow by 7.8
percent this year, down from 9.2 percent in 2011 and the lowest
since 2009. Data released in October indicated that
year-over-year growth rate slowed to 7.4 percent in the third
quarter, the lowest level in 14 quarters. The slowdown comes
after eight consecutive quarters of a government credit squeeze
aimed at slowing skyrocketing property prices, a boom that had
been triggered by a 4 trillion yuan ($638 billion) fiscal
stimulus in 2009.
I see more market driven resource allocation,
Neuberger Bermans Yao says. This is very, very
important. If you read President Hus speech to the
Communist Party School on July 23, he says, If we
dont take the reforms into next step we could risk losing
power. This is very, very serious statement.
If I remember correctly in past 35 years there were
only two times Chinese leaders made this type of statement.
First was 1978, when Deng Xiaoping said, If we dont
start economic reforms, China will lose citizenship of
earth. In 1992, Deng also made a similar statement,
If a leader doesnt initiate reforms he should step
down. We think the only way for China to take the next
step is to deepen reforms. Fortunately Chinese leaders realize