Articles:
China´s political contradictions

What is really happening in China? That isnow one of the most important questions for global businesses, which especially
includes Japanese exporters and the many Japanese companies that have opened
factories in China.  Firms operating in
China will know precisely what is happening to their own order-books and in
their own markets, but the situation in the wider economy is more of a mystery.

The most headline-grabbing sign of stress
has been in the Shanghai stockmarket, where an extraordinary year of soaring
share prices was followed by a slump of more than 30% since mid-June and by a
series of rather clumsy and ineffective efforts by the government to intervene
and stop shares from collapsing.

Yet stockmarket movements merely provide a
drama for the media. They are not yet very important for the economy, since
only 7% of China’s population is active in the equity markets. The main
importance of the Shanghai stockmarket’s volatile performance is likely to be
political, not economic.

For what is really happening in the Chinese
economy is a huge test of the inter-action between economics and politics in a
country still run by the Communist Party. In fact, it is even more than that:
it is a test of the choices and priorities of the Communist Party leadership between
different, and conflicting, political goals.

The basics of what is going on in the
economy ought to be familiar to anyone who knows about Japanese economic
history of the 1970s. In that decade, Japan made a big transformation, partly
driven by market forces and partly by government policy. Before that decade,
Japan’s economic growth had been led by heavy industry (steel, chemicals,
shipbuilding), by high levels of investment in factories and in urban
development, by exports, and frankly by a high toleration for environmental
pollution.

The transformation was to cleaner growth, less
dependent on investment and more on household consumption, and one that was led
by higher technology and consumer industries. This transformation was helped by
the fact that Japan was a democracy.

This is exactly the sort of transformation
that China’s non-democratic leaders have been calling for over the past ten
years, and which has finally started to happen. Or rather, part of it has
started to happen: investment, both in housing and in factories, has slowed
down, probably to zero annual growth once allowance for the depreciation of
fixed investment assets is accounted for.

However the other part of the
transformation, the replacement of investment-led, generally dirty growth, by
more consumer spending and by cleaner, higher-technology production, has been
slower to arrive.

For that reason, although official GDP
figures continue to predict economic growth this year of close to the
government’s target of 7%, many private-sector economists believe the true
figure will be lower, at 5% or even less. And they forecast growth for 2016 of
at best 6%.

This slowdown may prove to be temporary:
Japan too, during its transformation in the 1970s passed through a tough period
following the twin shocks of the oil-price rise of 1973 and the revaluation of
the yen. It takes time for industry to adjust and for new sectors to emerge
successfully.

This is where the politics comes in to
play. The industrial transformation that Chinese leaders have been calling for
over the past decade requires political interventions to reduce the dominant
power of some state-owned enterprises, to raise the cost of polluting, and to
allow private firms to expand in new sectors. Such interventions have been hard
to do, ever since Prime Minister Wen Jiabao began calling China’s economy
“unstable, unbalanced, un-coordinated and unsustainable” nearly a decade ago.

The global financial crisis also delayed
the necessary adjustment, when in 2008-10 the Chinese government intervened to
rescue its economic growth through a huge expansion in credit, much of which
was spent on construction and heavy industry.

Now, those political interventions are
needed more than ever. But they clash with another political goal, being led by
President Xi Jinping: establishing tighter control for the Communist Party over
corruption, the media and much private-sector activity. And the Party’s
interventions during the recent Shanghai stockmarket crash have made it look
heavy-handed, incompetent and not very interested in market solutions.

President Xi’s political priority is the
long-term survival of Communist Party control. Reducing the power of
state-owned enterprises, enforcing environmental laws and deregulating the
private sector are all necessary for the long-term health of the Chinese
economy. Are these goals compatible? That is what we are going to learn, over
the coming months and years.