Party reform will decide China’s economic future. That should worry us allby George Magnus / April 24, 2012 / Leave a comment
China is in the throes of its most important leadership change since Deng Xiaoping came to power over 30 years ago. Before taking office, Deng was reported to have told a Chinese Communist Party (CCP) conference: “I don’t care if it’s a black cat, or a white cat, so long as it’s a cat that catches mice.” His point was that to escape poverty and build a new economy, China had to change, and embrace “the market.” China’s new leaders will make choices about political and economic reform that are no less important. Their decisions will impact the chances of avoiding a sharp slowdown in the next two years, but more importantly, they will determine China’s economic and political path for at least a decade.
This is all manna from heaven for political and economic analysts. Investors also have strong reasons to monitor these developments closely, because the implications will affect both Chinese and global asset prices. For investors and analysts alike, it is of the utmost importance that they understand the significance of the changing of the guard in Beijing.
First, factional rumblings erupted in March with the sacking of Bo Xilai, the CCP chief of Chongqing province, who was considered a shoo-in for the Politburo standing committee, China’s most powerful decision-making body. These rumblings intensified in April, when Bo was publicly accused of having violated Party discipline and law, and his wife, Gu Kailai, was arrested in the course of an investigation into the murder of the British businessman, Neil Heywood. This remarkable turn of events surrounding such a senior official, his family and implicitly, his supporters in politics and in the military, is of huge importance. But the way the authorities have responded suggests that the significance lies more in the re-assertion of party rules and discipline, than in any root-and-branch reform of Chinese politics or liberalisation.
Yet political reform generally has become a major issue in China: Wen Jiabao, the outgoing Premier, insisted in March at his last big press conference that without successful political reform, economic restructuring could not happen.
Second, economic reform is essential because China’s economic and social model has developed serious flaws, imbalances and distortions, including severe income inequality. Changes are needed to avert the risk of a sudden, sharp slowdown in 2013-2014. They are also crucial if China is to avoid the so-called “middle income trap” over the next decade, a…