- Money Morning Australia

Why the New Chinese Leadership is Bad News for the Global Economy


Written on 19 November 2012 by Matthew Partridge

Why the New Chinese Leadership is Bad News for the Global Economy

One of the big stories of 2012 so far has been China’s slowdown.

Up until this year, China bulls argued that growth would never slow below 8% a year, because the party wouldn’t let it.

Yet the growth target was officially lowered to 7.5% earlier this year, as it became clear the Chinese economy was slowing. And with demand weak across the globe and the Chinese banking system carrying huge bad debts, it could get far worse.

So you might be inclined to feel a bit sorry for Xi Jinping. He’s the new leader of the Chinese Communist Party. He takes over from the previous president, Hu Jintao, just as the Chinese economy faces perhaps its biggest challenges yet.

The bad news is that what China really needs is some radical reform. Unfortunately, it’s not likely to get it under Xi. And that could be grim for the global economy too.

Why China’s Economy Needs Change

Economic reforms in 1979 kicked off China’s boom as the country was able to use its vast supply of cheap labour to grow rapidly. But in recent years, rising wages and soaring transport costs have reduced its cost advantage. Meanwhile, the large numbers of state-run firms are unable to compete with Western rivals on quality.

What’s the solution? More reform would help. A World Bank report suggested earlier this year that the state should stop directly running companies. Over time, subsidies should be reduced, and some firms sold off. Given that the report was prepared with the help of a major Chinese think tank, it looked as though this change might be endorsed.

And some of the most conservative politicians have fallen out of favour. Bo Xilai, who wanted a return to the Mao era, saw his career implode over corruption allegations.

There have even been rumours that the Chinese leadership was planning for China to move much closer to Singapore’s political and economic system. While the Communist Party would still retain power through indirect controls, the hope was that greater openness would cut corruption, while private enterprise would be encouraged.

Why Change Isn’t Coming Anytime Soon to the Chinese Economy

However, these hopes may have been premature. Outgoing leader Hu will still have a large amount of influence, even after the transition is complete in March. So it matters that Hu, in his last speech, put the emphasis on stability, not reform: ‘We must unswervingly follow the path of socialism with Chinese characteristics’. He even suggested that control over the press should be increased.

‘The Party leaders have decided that China’s political system will remain Communist, centralised, disciplined from the top-down and un-Western,’ says John McCreary of KGS Nightwatch. Anyone expecting reform has ‘misread badly the Communist leadership’.

For one thing, Xi played a key role in shaping China’s response to the financial crisis. That involved printing money to spend on infrastructure and subsidies for state firms. So Xi is hardly a big fan of the market economy.

He won’t have a free hand in any case. He will have to get agreement from the Politburo Standing Committee for most major decisions. The most influential of these leaders are opposed to radical change, or have vested interests in keeping the state at the heart of the Chinese economy.

Why What Happens in China Matters to You

China is the second-biggest economy in the world. With the developed world still fragile, many people are pinning their hopes on China to drive growth in future.

But reform is needed if China is to move towards being a consumer-led economy. It can’t keep relying on pumping money into infrastructure, or selling cheap goods overseas. That model is exhausted.

Yet its new leaders don’t look likely to deliver China the kind of change that it needs. That increases the chances of an outright crash. And even if it doesn’t, growth could continue to be disappointing.

A slower-growing Chinese economy will need fewer raw materials. This is bad news for industrial metals producers and commodity intensive countries such as Australia.

Matthew Partridge
Contributing Writer, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek

From the Archives…

Retirees and the Fed Face Off
16-11-2012 – Kris Sayce

Attention Investors: This Market is Worse Than it Looks
15-11-2012 – Kris Sayce

Avoid the Slaughter: Watch This Key Stock Market Pointer
14-11-2012 – Murray Dawes

Why Lithium is Another ‘Rare’ Element on China’s Radar
13-11-2012 – Dr. Alex Cowie

Who Says Gold Doesn’t Pay ‘Interest’?
12-11-2012 – Dr. Alex Cowie



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



How Money Morning Can Help You Can Become a Smarter, Better, Investor


Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…


Absolutely mind-blowing beyond my expectations

– D.A.C. Hall


The BEST INFORMATION available,
contrary to mainstream economic reporting.

– L. Sceresini


Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay


Click here to watch
the brand new Highlights Reel.

Openx pos2

  • ^NDX4082.559+16.286 - +0.40%
  • ^FTSE6819.75+13.95 - +0.20%
  • ^AORD5624.600+3.300 - +0.06%
  • ^AXJO5625.900+1.500 - +0.03%
  • AUDUSD=X0.9338
  • USDJPY=X104.075

Openx pos3

Diggers and Drillers

After three years in the doldrums…

Aussie resource stocks
are now a raging BUY
 
The last time resource stocks traded this low we saw a two and a half year rally that saw them gain 124%...
 
Now they’re getting ready to do it again. Read on to discover why…and three tiny Aussie miners that could explode up many times higher than that in 2014…click here.

Openx pos4

Openx pos5

Openx pos6

Openx pos7

Openx pos8

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Many Australian investors are turning to alternatives. Led by the SMSF crowd, investors are piling i [Read More...]

I wanted to know what Joe Hockey would do about the hundreds of millions of dollars the government. [Read More...]

This morning the Australian dollar trading for 93 US cents. It hasn’t managed to regain parity since [Read More...]

The government plans to force internet and telco providers to keep your digital information (metadat [Read More...]

So much money is fleeing China…that it is distorting the global economy, particularly in the art mar [Read More...]

You’re about to see, you can do a lot better. You can win at the stock market when you use the power [Read More...]

There are many things I don’t know. High on that list is the mystery of Qantas; how does it manage t [Read More...]

The longer we spend in France, the more similarities we see between its economic problems and those [Read More...]

As China continues to slow (possibly sharply), the iron ore price and broader terms of trade will co [Read More...]

Investing in small-caps is the best way that you make money in the stock market. But you should know [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery