Chinese perma-growth at risk as Leninists tighten Politburo grip
By Ambrose Evans-Pritchard
Last updated: November 15th, 2012
As expected, hardliners have won the power-struggle at the top of China's Communist Party, or at least they have won the latest round judging by the line-up of the Politburo's Standing Committee this morning.
This is beginning to look like a shocker for the world economy, with big implications for global growth, trade, oil and commodity demand, investment flows, etc.
Two key reformers were shut out of the seven-man Standing Committee: Guangzhou party chief Wang Yang and the head of the national party organisation Li Yuanchao.
Wang Qishan – the torchbearer of economic modernisation – did make it onto the committee but will be in charge of fighting graft, not fighting dinosaurs.
The North-Korea trained Zhang Dejiang – a champion of the state-owned behemoths – has risen further to prominence.
There is a growing risk – though only a risk – that China will hit the "invisible glass ceiling" that lies in wait for catch-up economies that rely too long on cheap labour and imported know-how, failing to make the crucial switch to a different kind of model before it is too late.
It is not easy to make the leap to self-sustaining growth on the creative frontier. No country has achieved it with a fully authoritarian system.
The outcome of the 18th Party Congress – the biggest change in Communist cadres since the Revolution in 1949, with 70pc of top jobs up for grabs – has shortened the odds that China will make the change in time. One starts to see the grim prospect that the country could grow old before it gets rich, which is not good for the world.
The main thrust of this orthodox revival in Beijing is of course political, not economic. China's leadership have watched the Soviet collapse, the revolutions of central Asia, and now the Arab Spring, and they don't like what they see. The press will be kept on a tight leash. Dissent will be checked.
Every member of the Standing Committee lived through the Cultural Revolution. Incoming president Xi Jinping spent seven years of his youth banished to labour duty in a remote Shaanxi village, much of it living in a cave. These are fresh wounds. We can all understand why the Communist Party dares not throw the country open to volatile forces. Stability is precious too.
The triumph of hardliners – and it is only a partial triumph – does not automatically preclude China from jumping to the next economic level. Yet there are surely implications if the party now clings to Leninist Capitalism, choosing not to follow Korea, Taiwan, Singapore towards a much more open system.
Mark Williams from Capital Economics says the glass is still half-full.
This is not the Standing Committee that reformers might have hoped for but neither should it be a cause for despair. Most senior officials in China now seem to agree on the need for economic policy reform.
Let us hope so, but this does not look to me like a leadership ready to jettison Deng Xiaoping's growth model – the export-led, mercantilist, top-down model of the last 30 years, nurtured behind a protective currency wall.
This Politburo is unlikely to heed the advice of the World Bank and China's Development Research Centre, which have together called for a second economic revolution to lift per capita income to levels in the West.
Incoming premier Li Keqiang vowed "unwavering support" for the findings of these two bodies earlier this year, but it is far from clear that he will be able to deliver on his plans. He will be hemmed in by Leninists, those most known for having championed state-owned giants (SOEs) in their own regions to drive development and fund patronage.
This is not good news. The World Bank/DRC report – the Bible of China's reformers – said the SOEs are the essence of the problem. A quarter lose money; their productivity growth-rate is two-thirds less than that of private firms; they gobble up available credit, forcing the private sector to go to the dark side at great risk.
I have written about this before but just to recap, the report said:
"China has reached another turning
point in its development path when a second strategic, and no less fundamental, shift is called for."
"The forces supporting China’s continued rapid progress are gradually fading. The government’s dominance in key sectors, while earlier an advantage, is in the future likely to act as a constraint on creativity," it said.
"The role of the private sector is critical because innovation at the technology frontier is quite different in nature from catching up technologically. It is not something that can be achieved through government planning."
The World Bank's pitch is that China is not doomed to fall into the "middle income trap". The decisions it makes over the next five years or so will decide the outcome either way.
But the line-up as the Standing Committee walked onto the dais this morning should be a cold douche for BRICs romantics and believers in Confucian perma-growth in the West. Will these men really get a grip on a credit-driven economy that has become ever more unbalanced – with investment reaching a world record 49pc of GDP, and consumption falling from a very low 48pc to just 36pc over the last twelve years?
The danger for China – and the for rest of us hoping that China will pull our economies out of their post-bubble swamp – is that the US Conference Board will be proved right with its dire warnings this week.
The Board said China's growth will fall to 5.5pc through the middle of this decade as the ageing crunch hits, and then fall to 3.7pc from 2019-2025. The compoud effects of this would be enormous.
All those predictions that China would vault into the stratosphere by the middle of the century – leaving America in the dust – would come to be seen as charmingly naive.
So we watch, nervously, waiting for further clues. China has everything to play for, and everything to lose.