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4 October 2012
a weekly chronicle of the Chinese economy
• The Chinese Communist Party (CCP) Congress will be held on
the 8th of November. The Congress will decide the composition of the State Council and its ultimate decision making body, the Politbureau Standing Committee, ahead of the formal handover of roles at the National People’s Congress in six months time. Politics has been at the forefront this year as the generational leadership transition has been accompanied by far more uncertainty and drama than the prior regime change. Phat Dragon is no elite political groupie, but such auto-taxonomy does not emancipate one from being showered with the standard lines of enquiry at a time like this when “you’re the China guy”. Have the leaders taken their eyes off the ball (economy)? Are they leaving stimulus to the incoming leadership? How do the markets perform in the first year under new leadership? Who’s in charge? Are we in a lame duck period? Got any inside goss on the Chongqing scandal?
reciprocal patronage model, with provincial ties a prominent element. Phat Dragon feels that each thesis has elements of reality. The patronage model arguably fits the historical CCP better, as it befits a system built around the heroes of the Revolution. The grand factions model would seem to describe the current struggle reasonably well, although the highly public demise of the Chongqing clique as an undesirable third wheel provides evidence for both the prosecution and the defence. Getting back to how this paragraph opened, one might deduce the rise of a grand factions type model as a corollary of the observation that individual legitimacy based on Revolutionary imprimatur is now absent. Then again, if the ‘one’ in question is of the instant expert variety (there is no doubt someone of this type being interviewed on TV right now) then an independent deduction of this kind would be a most unlikely event.
• The idea that the leadership transition is usually a smooth
• A CCP characterised by grand factions might be expected
decennial process of harmony and good cadreship is twaddle or slightly more politely, ahistorical. Phat Dragon’s view is that like so much financial and media analysis of China in the West, where ‘knowledge’ often stretches back no further than the mid 2000s, there is a lack of understanding of just how contested and fractious the political landscape can be. The transition between Jiang and Hu back in 2002 was relatively smooth, even if Jiang held on to his military role beyond the handover of civilian power, disturbing some plumage in the process. Over the 60-odd years of the People’s Republic, the politicaleconomic heights have been repeatedly struggled over, and a politically peaceful handover is a rarity, not the median. Whilst Mao was alive, the system swung from Command in the early 1950s, to Chaos during the Great Leap Forward and associated Great Famine, back to Command in the early 1960s, back to Chaos under the Cultural Revolution, on to internecine conflict through the early and middle 1970s, prior to the reform and opening up under Deng from 1978. While Deng remained the presumptive kingmaker for much of the post 1978 period, the internal struggle for control over the CCP’s strategic direction was highly contested. Indeed, enmities spawned during the damaging events of the late 1980s resurfaced in the Bo expulsion. So the idea that transitions between CCP leadership regimes are traditionally cosy, even handed and beautifully stage managed processes, and thus the current scenario is a dangerous outlier, is about as realistic as the dialogue in Arbitrage (if you haven’t seen it, Phat Dragon recommends you take along a bingo card and tick off the cliches). The current handover may look awkward, granted, but an outlier it is not. contested politics of the past is that with the inevitable passing of the CCP’s grandees, there are no living links to the Revolution remaining to usher their protégés into positions of power. Such sponsorship was the source of legitimacy. Lacking this ‘sacred’ blessing, princelings - second or third generation politicians - are the next in line. However, with the legitimacy of princelings being tenuous, they are being increasingly challenged by first generation politicians, most notably those from the Youth League, personified by outgoing President Hu. Some have chosen to style these groups as aggregate factions, with the Princelings (and ‘sea turtle’ foreign returnees) in one camp sponsoring an elite, pro-coastal tilt to policymaking and the Youth League pursuing a populist, pro hinterland agenda. Others find this too simplistic and prefer a personality based
– Economic Research –
to pursue a consensus driven policy agenda. Consensus politics tends to engender a status quo bias, a sort of ‘lowest common vested interest’ species of risk aversion. While China’s gradualist approach to marketisation and reform has been rightly celebrated, there were still many moments along the path when a risk needed to be taken and a decisive executive power-to-do had to be in evidence to drive through change. Phat Dragon is confident that the technocracy has a very good idea of what ought to be done and so do the key figures in the incoming regime. It is not a matter of knowledge but a matter of willingness (courage) and ability (power). An additional wrinkle is that the CCP has often been observed to act in a fashion that pays more than lip service to public opinion, despite no direct democratic imperative. Casting that behavioural frame over the incoming administration, if Phat Dragon is right that it feels somewhat vulnerable on the legitimacy front, then it might reasonably be argued that its decision making will err on the side of greater responsiveness to social concerns. of equipoise be achieved between the mounting challenges of rebalancing the economy, growing incomes and maintaining social harmony? Phat Dragon has a few ideas. 1) Work hard within the elites to build support for a redistribution of corporate rents towards a higher revenue share for all levels of government, which in turn can be applied to financing credible reforms of the fiscal, pension and household registration systems. 2) Build on the current momentum towards financial liberalisation, thereby reducing financial repression, improving the capital allocation function and boosting the real return on household savings. Financial market development will aid China in reaching its ultimate objective of moving away from an exchange rate anchor for its monetary policy, which will itself sponsor a positive realignment of the economic structure. Accompany this cluster of reforms with a behind the scenes plan to strategically deploy FX reserves if balance sheet concerns arise in the financial system as the nonfinancial private sector rebalances its portfolio. 3) Continue to address the housing affordability issue from the supply side, while altering the carrying incentives of the owners of multiple dwelling through the tax system. 4) Reform competition policy. And once the regulations are in place, enforce them.
• What would that mean in concrete terms? And how can a state
• What is different between the present situation and the
• Stats of the week: China is home to just over 8 million
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horses, more than anywhere else. The US is next, followed by Mexico, Brazil, Argentina, Colombia, Mongolia & Ethiopia.
Westpac Institutional Banking Group
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