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China's politics hinder effort to shore up economy

By ANDREW JACOBS

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LAST UPDATED: 02:17 a.m. HST, Sep 27, 2012



BEIJING » When it comes to confronting economic slowdowns, the Chinese government has not been shy about making bold moves. Faced with the contagion of global recession four years ago, policymakers created a $585 billion stimulus package that helped inoculate the nation against the economic malaise still sapping the U.S. and Europe.

But today, even as China's vaunted export manufacturing juggernaut loses force and the Shanghai stock market remains in a slump, the Communist Party appears so distracted by its politically tangled once-a-decade leadership transition that it is unwilling or unable to pursue the more ambitious agenda that many economists say is necessary to head off a far more serious crisis in the future.

Although the departing government has tried in recent months to address decelerating growth by easing bank loan restrictions, increasing pensions and offering tax breaks to small businesses, a lack of consensus among the top stewards of the economy has stymied a more muscular response, insiders say.

Similarly, many analysts question whether the incoming leadership has the political will to overcome the resistance of the so-called princelings and other well-connected families that have prospered under the current system.

China's standard economic formula, they say, is losing its potency: Overzealous government investment and lagging consumer spending are creating serious imbalances that are expected to lead to a much more painful reckoning, perhaps not long after the raft of younger leaders assumes power in early 2013.

"There are tough choices to make, but the central government appears to be so paralyzed they are just sitting on their hands," said Ho-Fung Hung, a political economist at Johns Hopkins University in Baltimore. "The situation is looking increasingly dire."

The economic data is indeed glum. Direct foreign investment has fallen for nine months out of the past 10, and industrial output is rising at the slowest rate in three years. Last week, Frederick W. Smith, the chief executive of FedEx Corp., the global airfreight titan, warned of more trouble to come, saying that China's faltering exports pointed to a weakening global economy in the coming year.

Since the death of Deng Xiaoping, the wily leader who steamrollered his conservative opponents to introduce market reforms in the 1980s and '90s, China's political system has increasingly operated through consensus. The horse-trading, involving a dozen or so men who negotiate in secrecy, has dimmed the prospect of significant political or economic change.

"The slogans are loud and the plans are grand, but when it comes to implementation, the constraints are many," said Zhao Xijun, an economics professor at Renmin University in Beijing.

Premier Wen Jiabao is a vocal advocate of what many experts see as the kind of change China needs: breaking up state-owned monopolies, encouraging more consumer spending and reducing reliance on investment in real estate and heavy industry. But he has already been rendered something of a lame duck because of his planned retirement in March. He lacks the political capital to undertake a more ambitious overhaul of the economy, particularly anything that would undercut the favored position of state monopolies, analysts say.

"Wen is a spent force," said a person with close contacts in the upper levels of the Chinese government.

To be sure, China's developing economy enjoys many advantages over those of most other major industrial nations, with growth still robust enough to prevent unemployment from rising significantly. But unrest is increasing, as riots at a big Foxconn electronics factory on Sunday demonstrated, and there is so much uncertainty surrounding economic policy and the leadership handover that few are willing to hazard a prediction about the future.

"The system is so opaque and the new guys are such unknown entities that no one really knows what to expect," said Alistair Thornton, senior China economist at IHS Global Insight.

Supporters of Xi Jinping, the man expected to be China's next president, and Li Keqiang, who is all but certain to replace Wen as premier, have been quietly putting out the word that the new team plans to introduce a more far-reaching agenda once the incoming leaders are secure in their new posts.

Some even argue that the worse things get, the better the chance the new leaders will have to deal with China's biggest challenges after the successors are announced at the 18th Party Congress, expected to take place next month.

"When the bubble bursts, there will be an initial period of pain," Li Zuojun, a prominent government economist, said in a recent speech, "but it would be good news for the new leadership because it would be clear who is to blame — their predecessors. The new leadership can start over on solid ground."

But so far, Xi has offered almost no clues as to where he stands on overhauling the economy, while Li's track record during his time as a provincial governor and party secretary suggests he is more of a risk-averse technocrat than a reformer.

For the moment, the world's second-largest economy is drifting, as exports to Europe and the U.S. wane. Some economists even suspect that the official figure of an annual rate of growth of 7.6 percent in the second quarter is overstated; indicators like electricity generation are rising much more slowly. Moreover, part of the growth led only to producing stocks of unsold appliances, toys and coal that are piling up at warehouses and ports.

Still, Beijing has largely held back from the kind of prodigious investment in housing and public works that propped up the flagging Chinese economy during the global downturn. In an editorial published this month, People's Daily, the party's influential mouthpiece, conveyed the official view, saying the central government should resist the temptation to spend its way out of the slowdown.

In a speech this month at a World Economic Forum session in Tianjin, Wen agreed that the government was holding its fire, but said that it would step in forcefully if necessary. Beijing has a budget surplus of $158 billion, with $16 billion more in a reserve fund, he noted.

"We will use that money at a right moment for pre-emptive policy and fine-tuning to propel stable economic growth," Wen said.

Local governments, alarmed by a slowdown they fear could lead to mass unemployment and the kind of sluggish growth that can dent political careers, have decided to take matters into their own hands. In recent months, a number of cities have proposed extravagant infrastructure projects they hope will be financed in part by newly liberalized bank loan policies.

Tianjin claims $236 billion will be spent in the petrochemical, aerospace and other industries. Xi'an, home of the famed terra cotta warriors, plans to invest tens of billions of dollars on nine new subway lines. In Guizhou, one of China's poorest provinces, officials said they hoped to funnel $472 billion into tourism-related development.

In Changsha, the provincial capital of Hunan, officials brag of 12.9 percent growth as they spend billions of dollars on a new subway system, a ring road, an intercity rail line and a pair of bridges to knit together its transportation system.

"We haven't felt any impact from the crisis in Europe," said Liu Maosong, chairman of the Hunan Economics Association and an adviser to the Changsha government. "Our guiding philosophy is ‘investment, investment, investment."'

Even if many such projects turn out to be wishful thinking, economists have expressed alarm that municipalities are still chasing debt-financed growth.

"It almost scares me to death," said Mao Yushi, a prominent economist. "Local governments are using the people's money for investment, but when they can't repay the banks, the financial system will snap."

And Liao Jinzhong, an economist at Hunan University, worries that much of the spending is misplaced. "What we really could use is a functioning sewage system," he said, speaking from his sixth-floor apartment in a crumbling faculty building that has no elevator.

Liao said he gave frequent lectures at the local party school about the dangerous fixation on propping up growth figures at all costs. He said officials often congratulated him on his frank views.

"But then they admit they can't change the way they do things," he said. "Given that the whole system is oriented toward bolstering the careers of officialdom, I just don't see things changing any time soon."






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