China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

The Changing of the Guard in China

December 5, 2012

Very recently, China revealed the new team that will run the country for the next five years – and gave some hints of what will happen beyond that. The top tier of the new leadership has received the most attention, but in many ways their elevation was a foregone conclusion. Xi Jinping and Li Keqiang have been tapped for the positions of President and Premier since their elevation to Vice-President and Executive Vice Premier five years ago. Indeed, they are the only members of the nine member Politburo Standing Committee who did not retire. Nor are the names of the five other additions to the now narrowed Standing Committee unexpected. Only ten of the wider twenty five member Politburo were not scheduled for retirement in 2012.

Three of the new Standing Committee members: Zhang Dejiang, Yu Zhengsheng and Liu Yunshan, are all serving their third five year term on the Politburo. Zhang Gaoli and Wang Qishan were also promoted. The three left behind were Liu Yandong, the only women on the old Politburo, Li Yuanchao and Wang Yang. Much has been made of the last two’s failure to achieve promotion because they are associated with outgoing President Hu Jintao and are seen as liberal political reformers. However, they were also the youngest on the old Politburo and are highly likely to be promoted to the standing committee in five years – when all of the five new standing committee members will retire. Thus, continuity more than politics may be central to the leadership’s promotion selections.

Just as interesting as who was promoted to the Standing Committee is who was added to the wider Politburo. Fifteen of the twenty five slots were open due to retirement – and in the case of Bo Xilai expulsion. Nine of these new selections will also be of retirement age in 2017, meaning that of the just selected Politburo only ten will be available for promotion to the next Standing Committee. Whether the Standing Committee in 2017 is seven or nine, the list is already pretty well set – showing that stability is a key goal in designing the Politburo every five years. Two names stand out in this regard, as Hu Chunhua and Sun Zhengcai are the only two selected this term who will be young enough to continue in ten years. Hu Chunhua, in particular, has long been tapped for promotion as he was leader of the China Youth League, like Hu Jintao. Indeed, their careers are so alike and Hu Jintao’s mentoring of Hu Chunhua so strong that the younger man is called Little Hu.

Several elements of the new leadership point in the direction of increased financial and economic reform, but political reform not so much. First, all of the new Standing Committee members are considered conservative on political issues. However, even the “reformers” left of this year’s list are hardly liberal by US standards. Americans often look for a trend toward democracy which does not exist in China. Yes, there are always some protests, particularly in Hong Kong, but most are over local issues in townships, not directed at the central leadership. Looking for politically liberal Politburo members in China is like looking for moderate clerics in Iran – on an American spectrum there are only shades of conservative.

A shift toward financial and economic reform is likely as there will be significant change at the top of the financial leadership. Many well-known names like Zhou Xiaochuan (Governor of the People’s Bank of China), Chen Deming (Minister of Commerce), Xie Xuren (Minister of Finance) and Zhang Ping (Chairman of the National Development and Reform Commission) will all be replaced due to retirement. Many see the hand of 86 year old former President Jiang Zemin in the design of the current leadership. This is re-emphasized by the fact that current President Hu Jintao will also give up his leadership of the military, something Jiang held onto for two years after he stepped aside as President ten years ago.

Jiang’s Shanghai clique had been aggressive in exploiting paramount leader Deng Xiaoping’s message that it is good to be rich. However, under the Hu and Wen leadership of the past decade, much more attention was given to development of the interior and the West, state owned enterprises were more favored, and the more market oriented east coast provinces saw some of their luster dim. The downfall of Bo Xilai and the massive concentration of wealth that occurred during this period has undermined the Party and there is a backlash underway. Wang Qishan, known as a top notch problem solver, has been named the head of Party discipline, rather than to a financial post. Three of the five new members of the Standing Committee took their most recent positions to clean up after a corruption scandal. It looks like there is a new sheriff in town. Even in China, the drift is toward more regulation.

Much has been made of the competition between the Princelings and the China Youth League (Tuanpai) coalitions within the Party, but as we have commented before this is largely a function of education. Most of the new leadership was born between 1945 and 1955, meaning they went to college when very few received higher education due to the Cultural Revolution. One either had to be politically connected (the Princelings) or well regarded by the internal promotion ladder in the Party (the China Youth League). Yet, nearly half of the new twenty five Politburo members have advanced degrees, and both leaders have Ph.D.s – Xi in law and Li in economics. The only US President with a Ph.D. was Woodrow Wilson.

Unlike, their predecessors whose education was primarily in engineering (at Soviet style institutions) the majority of the new group are trained in law, economics and management – reflecting the Party’s understanding immediately after the Cultural Revolution that these were skills that were in high demand. Four of the seven Standing Committee leaders were sent to work in the countryside as educated youths – including two of the Princelings and both leaders. This group has a much different view of the world if only because they came of age during a time where strong Chinese growth was a permanent feature. They are now tasked with fostering that growth into a new era where due to sheer size and changing demographics, growth will slow. The question is by how much and what are the consequences for debt and income distribution as a result.

As the most likely locomotive of world growth, the decisions of this new group may be far more important than what the US does on the fiscal cliff or Europe does with fiscal integration.

 

 

 

 

 

Michael Drury
Chief Economist, McVean Trading & Investments

Back to Start Page

China’s Responsibility for the Global Environment

Currently, the UN Climate Change Conference is taking place in Doha. The objective of this conference is to make plans from the Durban meeting one year ago concrete. This means more detailed that a global climate treaty should be set up by 2015 and be implemented by 2020. The whole issue of the deteriorating global environment is getting more urgent each and every year. In fact, there is no time to lose.

However, the situation still seems to be paralyzed after the failing climate summit in Copenhagen three years ago. In the meanwhile, carbon dioxide (CO2) emissions continue to increase rapidly. China’s CO2 emissions are now almost twice as much as those of the U.S. which means an increase by almost 300 percent since 1990 (the U.S. +9 percent during the same period, India and Indonesia +200 percent, Germany and the UK -20 percent). According to most calculations, China stands now for 25 percent of all global CO2 pollution, mainly related to the rapid industrial expansion and the predominant use of carbon for energy production (75 percent).

Just looking at this very brief statistical summary points at the ongoing environmental conflict between China, other emerging countries and most Western interests (but the U.S. never ratified the Kyoto agreement). Emerging countries are – in line with their term – expanding their economies quickly, and actually more quickly than the rest of the world. Since these countries consider the West / Western countries to have a kind of historical debt for their lagging development, the group of emerging countries – informally led by China and India – does not consider their absolute volumes of pollution as the decisive reduction indicator – but the pollution or GDP per capita.

Regarding historical or emotional dimensions, this kind of approach may look understandable. But relative calculations tend to be misguiding when absolute numbers become really high. This is why China’s role in the long way to better global climate conditions has to be regarded as both decisive and morally important, particularly since China can be supposed to remain a rapidly growing economy also in the foreseeable future – even in the case of temporary growth distortions. In other words: China’s responsibility for the global environment will continue to increase. Thus, calculations based on per-capita measurements will become more and more obsolete. However, Western interests should negotiate with China on fact-oriented levels – and not with arrogant and superior attitudes!

Finally, it should be said that also China itself would benefit from a clearly improved environmental outlook at home. Its people will be happier, more healthy and more productive – which certainly will add to economic growth in the longer run.

Summary: It will be one of the most important strategic decisions of the new Chinese political leadership to give the long-term objective of a substantially improved environment enough priority compared to short-sighted growth considerations.

 

Hubert Fromlet
Professor of International Economics
Editorial board

Back to Start Page

Re-considered: The Competition between Brazil and Mexico – and China’s Role in this Competition

November 7, 2012

Summary in English

Competition between the two Latin American giants, Brazil and Mexico, has been fierce for many years. Joining the North American Free Trade Area (NAFTA) in 1994 gave Mexico a couple of very successful years. In 2000, expectations of more fundamental economic reforms were high when president Vincente Fox took over after 70 years of leadership by the Institutional Revolutionary Party (PRI). However, reform expectations were not met since Fox did not have a political majority in parliament – a situation which his successor Felipe Calderón from PRI is confronted with as well. Ironically, the new Mexican leaders now support the reforms that they critically rejected during the 12-year presidency of Fox.

Contrary to Mexico, Brazil entered the new century with a lot of doubts and question marks. In 2001, Brazil was hit by the Argentinian crisis. The South American free trade area Mercosur moved on very slowly. The business climate worsened further when the former leftist union leader Lula Da Silva won the presidential elections in 2002. But Lula changed style in time and went visibly for economic stability and reforms, well supported by parliament – contrary to Vincente Fox in Mexico. Lula was even re-elected in 2006.

Statistics give an obvious answer on the results of Mexican/Brazilian economic competition (GDP growth 2000-2009, average: Mexico 1.7 percent and Brazil 3.3 percent). Apart from domestic political conditions, one external factor contributed a lot to the different performance of Mexico and Brazil: the rapid rise of “manufacturing China” which very sharply turned out to be a main competitor to the “manufacturing Mexico”, particularly what concerns exports to the U.S. During only one decade, China more than doubled its exports to the U.S., much at the expense of Mexico. At the same time, Brazil was very much favored by China’s commodity import boom. Last year, China absorbed 17 percent of all Brazilian exports which means that China has advanced to number one of all Brazilian export markets.

During this ongoing decade, growth perspectives may again change pattern. Chinese total import growth may weaken somewhat on trend in the forthcoming years. Mexican competitiveness may be supported by the peso depreciation in the past years. So far, the GDP growth numbers of Mexico and Brazil are quite similar since 2010, around 4 per cent, with Mexico a little bit in the lead.

The relatively dampened or weak global growth outlook should lead to the conclusion that domestic demand in Mexico and Brazil may play a somewhat larger role for economic growth in the forthcoming years than in the past. In this context, Mexico may have a little better cards because of its substantially lower public debt in relation to GDP, slightly above one third compared to more visibly above 50 per cent in Brazil.

Read the whole analysis (in German)

 

 

 

 

 

Mauro Toldo
Head of Emerging Markets / Country Risk Analysis, Deka Bank

 

 

Back to Start Page