China’s challenges in 2016

February 4, 2016

China’s challenges in 2016

by  Kerry Brown, King’s College London

For China, the story for its economy in 2015 simply reinforced what was already becoming apparent through 2014. GDP growth was slowing, and the political capital the Communist Party could collect from lauding this one statistic was diminishing.

Chinese President Xi Jinping visits the parliament in Cairo, Egypt on 21 January 2016. (Photo: AAP).

Premier Li Keqiang even suggested in November that growth would fall from `around 7 per cent’, to something closer to 6.5 per cent. The era of the`new normal’ was well and truly upon China. The need to increase its performance in services, raise consumption and support urbanisation was therefore also growing.

A sign of this was the removal of the one child policy, which had been in place since the late 1970s, announced during the Fifth Party Plenum in late October. In practical terms, the consensus of experts was that this would have little impact. There had been many exceptions to the rule. And, on the whole, Chinese middle classes kept to the one child per family pattern through economic necessity rather than fidelity to government edict. Even so, this was a measure so closely identified with the reform and opening up process that its relaxation was highly symbolic of China entering a new phase.

2016 will be dominated initially by China figuring out how to achieve the great `rebalancing’ that is central to delivering its first Centenary Goal in 2021 — middle income status. This will be part of the 13th Five Year Plan, a remnant from when China truly was a centralised command economy. The draft of the program mapped out in detail how the country planned to build a credible finance system, tackle inequality and achieve green growth. Old themes, but they have been injected with a new urgency.

There is no sign that 2016 will see the fight against corruption vanish. Led by the formidable Wang Qishan — head of the Central Discipline and Inspection Commission and regarded as the closest current member of the Politburo to President Xi Jinping — military, political, state enterprise and provincial figures have all been attacked. But the issue is whether there will at some point be a Party backlash against what Wang and his colleagues describe as an indefinite `struggle’ rather than a limited campaign.

While bringing down venal officials has proved popular with the public, the core issues that most concern them — housing costs, welfare, healthcare and the state of the environment — are far harder to sort out than the Communist Party’s own internal governance. In terms of these issues, the Xi era has been characterised by policy activism, with annual major announcements. But the delivery has been less clear.

By the end of 2016, Xi will be approaching the halfway point of his expected decade in office. While Xi is perceived to be strong and powerful, and sounds authoritative, he needs to chalk up tangible benefits rather than just foreshadowing future policies. Chinese cities continue to be blighted by smog, house prices continue to rise, the Shanghai Free Trade Zone continues to be elusive and wages continue to remain lower than the emerging middle class want. 2016 has to be more about delivery and less about promises.

Despite the continuing tensions in the South and East China Seas throughout 2015, it was in the realm of foreign policy that Xi showed the most boldness and brought home a number of significant achievements. Major environmental accords were agreed when Xi went to the US in September. A large renminbi deal was signed off along with huge investment agreements in the UK in October. But the pinnacle achievement came in November, when Xi met with Taiwan’s Ma Ying-jeou, the first such cross-Strait meeting between the leaders since 1949.

Speculation about what prompted this dramatic event ranged from weakness on the part of Taiwan, to a sense of frustration from Beijing over the lack of political traction despite burgeoning economic links. But part of the calculation had to be the Taiwanese presidential election in January 2016 and the real possibility of the more pro-independence Democratic Progressive Party gaining power. A bilateral leaders’ meeting would not have been as easy if this happened, so Xi took the chance while it was still there. For this event alone, he has earned a place in the history books.

2014 and 2015 have been marked by frenetic activity on the policy, diplomatic and political fronts from the People’s Republic of China. 2016 will be a good year if it is quieter and less dramatic. The excitement can then be confined to 2017, when the next major Party Congress is due.

Kerry Brown is Professor of Chinese Studies and Director of the Lau China Institute at King’s College London.

This article is part of an EAF special feature series on 2015 in review and the year ahead.

9 thoughts on “China’s challenges in 2016

  1. katasayang: I know him very well. He was born as Lin Zhengyi. When he was a captain in the ROC army stationed in Kinmen, he swam over with a basketball to Xiamen to defect to Mainland China in 1979. He later changed his name to Lin Yifu. To date Taiwan does not let him go back to visit his parents’ graves.

  2. The analysis sounds incredibly sanguine, one could say even facile. China is in fact facing huge challenges in its economic “rebalancing.” Witness the volatility and weakness in the Chinese stock market and currency in the past several months. Given the communist party’s extensive control of the financial system, the Chinese economy is unlikely to collapse in the manner of Thailand in 1997 or South Korea in 1998. But the next few years will be extremely difficult.

    The bigger danger (and unknown) is the potential for political instability as the economy slows down further over the next several years. China’s growth model has essentially run to the end of its road, and it is finding difficulty in switching to a new sustainable model. If you really are interested in solid detailed analyses of the Chinese economy, read Michael Pettis’ blog. He is a professor at Beijing University.

  3. Michael Pettis believes China has greatly over-invested borrowed money in factories, infrastructure and construction, leading to a painful reckoning. He points to the country’s recent record-breaking market sell-off and gloats how right his theory is. In his blog economist Nicholas Lardy challenges Pettis to point out China has entered a virtous cycle in which rising household income and consumption is stimulating the growth of labor-intensive service industries, giving a strong counterweight to the slowdown in investment. China’s continued control over the economy also gives the government tools to manage the transition without crisis. I agree with Nicholas Lardy, for Michael Pettis has failed to recognize the fact that China has no political opposition from entrenched interest to overcome with.

  4. It is true there is no organised political opposition to CCP rule. That’s because you can’t form a political party in China! I do disagree with the assertion that there is no political opposition whatsoever. If so, then why do the Chinese authorities keep locking up people for political dissent?

    I’m would also say that one should not be too complacent about the stability of CCP rule in a situation of slow growth. Not many people predicted the breakup of the USSR or the Arab Spring for example. Even long-term economic trends are not easy to predict, much less political trends. Not many people foresaw the Asian Crisis 1997-98. Not many foresaw the 2008 crisis. If history is any guide, it moves in zig-zags rather than a straight line, and sometimes those zig-zags never return to the previous trend (like Japan has never recovered from its 1980s bubble bursting). Doesn’t mean that China can’t do well over time, but I won’t bet on a straight line advance.

    And to be fair to Pettis, he did not “predict” the recent Chinese market sell-off. If you read his writings more closely, he in fact declaims any praise for predicting market moves. He has never offered any prediction of the Shanghai stock composite index, for example. He is in fact cautiously optimistic about the Chinese economy over the long-run, but he does believe that it has overborrowed and over-invested over the past decade or so. And to be even more fair to Pettis, he was predicting the Chinese structural growth slowdown several years ago when most China economists were still rigidly clinging on to the CCP’s 8% (“bao ba”) growth target.

    Finally, one does not have to be anti-China to think that it could struggle economically (and perhaps politically) in the next few years. The US itself suffered a massive economic downturn in the 1930s, but it recovered and became the wealthiest and most innovative economy in the world. The US too has largely recovered from the more recent 2008 crisis. In my view, an established democratic system of governance with a strong legal system helped the US to weather these economic storms without major political upheavals. If China were to fall into a similar period of economic difficulties, I believe CCP rule will be tested.

  5. “The Chinese stock market panic is unlikely to trigger a financial crisis in China, but not, as many argue, because of its relatively small size and narrowly dispersed ownership. What matters is that although nationally there are significant mismatches between assets and liabilities among individual institutions and within particular sectors of the financial services industry, and these mismatches are highly pro-cyclical, China is protected from crisis by its relatively closed capital account, its high level of reserves, and most importantly of all, the fact that much of the mismatch between assets and liabilities are resolved on a system-wide basis through Beijing’s implicit or explicit guarantee of most components of the country’s financial system.” – Michael Pettis, 9 July 2015

    Since that day, the Shanghai composite index has fallen 28%. Nor did Pettis predict the CNY depreciation starting in August 2015. So whatever his merits, Pettis did not predict the Chinese sell-off, and to be fair to him, he rejects any such (misplaced) praise because he is not a financial market pundit. He is an academic.

  6. I do not believe Pettis is anti-China or Lardy pro-China. I only pointed out there two opposing views and I agree with Lardy’s arguments. I do not believe the Chinese economy will have a hard landing nor do I believe it will have a soft landing. I believe it will be a bumpy but safe landing. Economics is not an exact science. We have to wait and see who is right.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s