Tony Saich – China's New Leadership

7/28/2019 Tony Saich China's New Leadership

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New Leadership: Characteristics

Very significant turnover: 64% of Central Committee; 15 of 25 in Politburo; 5 of7 in the Standing Committee

Standing Committee reduced from 9 to 7

Average age of Standing Committee = 63; 5 will have to step down

SC members chosen on basis of age and experience rather than policy;favorable to Jiang Zemin

Politburo 3 characteristics:

Provincial experience key (19 of 25)

Decline of central ministries/technocrats (1 of 25)

Rise of the princelings, majority of the Standing Committee


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What Might they Do?

We do not know!!

Impact of Bo Xilai affair

temporarily took eye of the economy Prevented the new leadership from outlining any positions

Third Plenum end of next year will be first clear policy indication

Need to take action to avoid serious problems in a decade or so

Major challenges to be faced: Economy: restructuring drivers of growth

Society: aging society, inequality

Politics: corruption


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Economy: Longer-term Development

12th five year program commits to realize the original objectives for theeconomy set out by Hu-Wen in 2003-04, none of which have beenrealized Reduce dependency on the two main drivers of growth: investment and export

demand Longer-term goal to increase domestic consumption and domestic productivity

growth

Road map for accelerating changes in the mode of economic growth

Shift to consumption will over time further slow growth (34% of GDP)

Investment in infrastructure and industry will remain important but little capacity forinvestment/GDP ratio to rise much further

problem is not level of investment but rather ineffectiveness2010, capital stock per person only 20% of US at PPP

Same limited capacity for exports to expand much more

Problem of savings rate with respect to boosting domestic consumption


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New Growth Model?

Strategic Industries

Investment in Strategic Emerging Industries

7 industries with 14 trillion yuan to be invested to raise contribution from5% of GDP to 8% by 2015 and 15% by 2020 Biotechnology

New energy

High-end equipment manufacturing

Energy conservation and environmental protection

Clean-energy vehicles

New materials

Next generation IT

From their work portfolios, you can work out which senior leader oversees which set offunds


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New Growth Model?

Political Opposition

Incentives for local officials are growth oriented Only Beijing and Shanghai have announced growth figures close to the

target

Many provinces have announced growth targets near 13%

Coalition of vested interests that have blocked reforms Export and import competing industries

Coastal provinces

Real estate and construction industries

Chinas commercial banks

Growth is sustainable but it is deeply unfairneed to undergo thetricky transition from a mobilization to an efficiency focus


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An Aging Society

Negative effect of higher dependency ratios and greater expenditures on elderlycare

By 2050, China will age on average 13.8 years (US 3.6)

Will be the first society to grow old before it grows rich

2040 peak population of 1.54 billion

Already officially an aging state with over 10 per cent of the population over 60

4-2-1 family structure

Consequences

Significant pension obligation to deal with

Significant increase in medical costs

Lower fertility rate = lower domestic savings rate but a higher return to labor


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Corruption

Received great stress at the Congress and in Xis post-Congress

comments

Can it be combatted? In-house party affair

Leading family benefits from current system

Vested interests: 90% of Chinas wealthiest people are officials or party

members; 90% of millionaires are children of high-ranking officials

2011 survey: only 6.4% thought government would seriously tacklecorruption


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Consequences

Policy will:

Confirm continued economic growth with more attention paid to socialequity and the environmental impact

Populist concerns reflected in increased state spending on rural schools,clinics and infrastructure

Elitist concerns reflected in adoption of the Property Law and morefunding for college scholarships

Joint concerns reflected in significant military and state spending

Protectionist measures for Chinese industry and potentially a lesshospitable environment for foreign enterprise

For the economy more specifically: Continuation of support for export-led growth; greater attention to boosting

domestic demand; improve domestic innovation; capture larger share in valueadded in global production chain; some redirection of investment to NE andWest; Bohai region as major focus for development


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Consequences

The business environment may become tougher and foreign companies will have tobe betterat framing their activities acceptable to the leaderships future aims

It will be important to develop productive relationships with rising members of the 5 th

Generation

Opportunities exist for foreign businesses to tap into these priorities

Energy and raw materials access and security

Advanced technology

Developing Chinese global brands

higher quality growthlife sciences, R&D, university development

Energy with respect to efficiency and pollution control projects

Internationalization of large SOEs in key sectors

Opportunities to serve new secondary, inland cities and new markets created byurbanization and improved infrastructure and logistics


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Possible Scenarios

A) Continuation of the status quo

Financial/economic reform but little political adjustment

Reconfigure interest rates for positive returns for household savings

Abolition of hukou Introduction of a property tax

Open up profitable sectors of SOE-controlled economy

Moderate family planning program

B) Democratic breakthrough (Taiwan/South Korea)

C) Derailed democratic reform (Putins Russia)

D) Harshened authoritarian rule (Latin America before democratization)

Tony Saich – China's New Leadership

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