International Herald Tribune, 25 January 2012
By DIDI KIRSTEN TATLOW

BEIJING — This year, as China faces its first leadership change in a decade, it’s stability, stupid.

Maintaining a dynamic economy is, of course, a key aim of the Chinese Communist Party. But politics are tense, so painful adjustments that may increase unemployment, inflation or threaten social calm, while seen as crucial over the longer run, are unlikely for now.

As Beijing increasingly flexes its muscles in the geopolitical arena, China is about to undergo a crucial political transition — only the fourth since Mao Zedong seized power in 1949. The changes are expected to begin at the 18th Party Congress in the autumn, whose exact date is still a secret.

Scores of top leaders in the party, government, army and legislature, including President Hu Jintao and Prime Minister Wen Jiabao, will retire and be replaced by a younger generation in a process that will continue into 2013.

As a result, analysts inside and outside China say the leadership wants stability, or ‘‘wending’’ (pronounced ‘‘wen-ding’’) above all, even if that means dialing down some of the important changes contained in the 12th Five Year Plan, adopted last year.

The divide between rich and poor in China is substantial, and many people believe state-owned industries have become too powerful. But big changes that might upset an already fragile social balance will be put off until after the political transition.

These include the mammoth task of adjusting away from an old model relying on cheap labor and export-led growth, toward more ‘‘sustainable’’ growth built on increasing domestic innovation and consumption and on upgrading strategic industries. China also is racing to develop new energy industries and improve environmental protection.

But while the government considers these last two essential to overcoming China’s biggest obstacles, implementing them is harder.

‘‘The five year plan is relevant to a certain extent; it is important,’’ said Cheng Li, director of research at the Brookings Institution’s John. L. Thornton China Center.

‘‘But compared to the leadership transition,’’ Mr. Li said by telephone from the center’s headquarters in Washington, ‘‘the plan becomes so totally trivial, because any major personnel changes will completely change the policies or agenda.’’

The divide between rich and poor in China is substantial, and many people believe state-owned industries have become too powerful. But some say big changes that might upset an already fragile social balance will be put on the back burner until after the political transition has been completed.

‘‘This year will be very boring; it will be all about stabilizing prices, growth and employment,’’ said He Fan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Mr. He added that he was more optimistic than many outside economists about the prospects for Chinese growth over the near term, but he expected fresh problems to emerge in 2013 or 2014, when the new leaders were in place.

The outlines of the looming political changes are clear, if the detail is not. ‘‘The mood in Beijing is not as optimistic as the last time,’’ Mr. Li said, when Jiang Zemin, then the Communist Party leader and president, handed power to President Hu starting in 2002.

Some problems cannot wait — principally, very high levels of government-led investment that appear to be getting out of sync with the underlying needs of the fast-growing Chinese economy.

While rumors are swirling about who will be the next prime minister, either the long-tapped Li Keqiang or Wang Qishan, both of whom are now deputy prime ministers, no one is seriously challenging the president-in-waiting, Xi Jinping, Mr. Li said.

A heavy focus on politics this year means that tackling imbalances in the economy and inequalities in society, symbolized most potently by exuberant spending on luxuries like premium liquor, gambling in Macao and purchases at duty-free shops across the globe, will be pushed into the future.

‘‘This year we’ll get decent growth because it is a leadership transition year and no one wants bad numbers, but it’ll be interesting to see if it’s the economic reformers’ 7 percent, or the old guard’s 8 to 9 percent,’’ said Michael Pettis, a finance professor at Peking University’s Guanghua School of Management.

‘‘For me the main question is, At what point will they begin the rebalancing and adjustment process?’’ Mr. Pettis said. ‘‘This means bringing investment levels down slowly, raising interest rates, raising the value of the currency and raising wages.’’

Sheng Hong, director of the Unirule Institute of Economics, a private research group in Beijing, said that postponing needed changes would only make them harder to deal with. ‘‘I don’t hold much hope for the 18th Party Congress,’’ Mr. Sheng said. ‘‘I’m afraid I don’t have many hopes it will bring big changes.’’

Yet while there may be serious bumps along the road, Mr. Sheng said the fundamentals of long-term growth are still firmly in place.

‘‘Every year about 20 million people move to the cities and there’s a lot of industrialization and urbanization to come,’’ he said. ‘‘We need very large investment to cater for that. Farmers’ incomes rise when they get to the cities and their lives change. This isn’t over yet.’’

Sociologists estimate that China crossed a historic watershed in 2011, with just over 50 percent of Chinese people now living in the cities.

But far more worrying was the skewed nature of the economy.

The Chinese are the most avid duty-free shoppers in the world, according to Global Blue, a tax-refund shopping company based in Switzerland, spending $2.15 billion in the first 11 months of 2011, a 56 percent increase over the period the previous year, said Marie Bergfelt of Global Blue. The sum does not include duty-free shopping in Hong Kong, which is the biggest destination for Chinese shoppers, she said.

High import duties on many foreign brands in China’s protected domestic market are a central reason for the explosive growth, Mr. He said.

Meanwhile, gambling in Macao has soared, with the former Portuguese enclave recording $33.5 billion in revenue last year, five times that of Las Vegas.

Mr Sheng singled out privileges given to state-owned enterprises as a major imbalance in China’s economy. Of 46 Chinese companies on the Fortune Global 500 list in 2010, 40 were state-owned.

Their profits rest on ‘‘numerous preferential policies and an unfair business environment,’’ according to a research report by Mr. Sheng’s institute, titled ‘‘The Nature, Performance and Reform of State-owned Enterprises.’’

State-owned companies pay very little rent for land and get inexpensive bank loans, Mr. Sheng said, adding that the rates were several percentage points below those of the market.

The companies should have paid 3.93 trillion renminbi, or $622 billion, in rent for industrial land from 2001 to 2009, a sum that would account for 67.2 percent of total nominal profit, the institute’s research report said. If commercial and service use land were included, the sum would be higher — an additional 1.21 trillion renminbi.

The savings from 2001 to 2008 were equal to 47 percent of profit for state companies, the report said.

‘‘Their privileges amount to more than 1 trillion renminbi per year,’’ Mr. Sheng said, adding that the money would normally flow to the finance ministry and could be put to better use elsewhere.

Of course, state-owned enterprises are a pillar of China. They are major employers and politically reliable. No one expects them to change soon.

Yet as China looks ahead, past this year’s political tensions and into the second decade of the 21st century, there are other problems that some warn cannot continue — principally, very high levels of government-led investment that appear to be getting out of sync with the underlying needs of the fast-growing Chinese economy.

‘‘Currently, investment is far ahead of the economy’s needs and this is a serious problem,’’ said Mr. Pettis, with subways, highways and other facilities sprouting everywhere. ‘‘They need a radical change of direction, which means abandoning the investment growth model. But this year, at most, they may just slow it a little bit.’’

The Chinese economy, Mr. Pettis warned, is repeating mistakes made elsewhere. ‘‘China’s economic growth model is actually not unique,’’ he said. ‘‘This is a fairly old model used many times before, and it always works to generate real growth until investment begins to be misallocated on a large scale, which has happened every time.’’

Even Mr. He, more sanguine, agrees.

‘‘Generally speaking, in 2012 investment will still be very strong,’’ he said. But the next five year plan will have to dial back on such high investment levels. ‘‘Everything will already be built,’’ Mr. He. said. ‘‘Cities will have subway systems and airports — everything it took the West a hundred years to build. The boon of the demographic profile will be gone. China will be an aging society.’’

That suggests China should be paying much more attention to developing a robust service sector, especially in areas like health and elderly care, which have traditionally been left to families, rather than a government responsibility or a business activity.

‘‘But they’re not doing it,’’ Mr. He said. ‘‘I don’t know why. Perhaps because of vested interest groups.’’

As a result, he concluded, ‘‘I’m optimistic in the short term, pessimistic in the long term.’’

http://rendezvous.blogs.nytimes.com/2012/01/24/chinas-coming-standstill/