• by: Michael Sainsbury: The Australian

Chinese New Year celebrations are expected to flag significant changes Source: Supplied

The crackers will celebrate the Chinese New Year and spring festival, ushering in the Year of the Dragon, the most auspicious of the 12 years in the Chinese zodiac.

The Year of the Dragon is when, according to China’s astrologers, big things come to pass.

And this year, not much will be bigger than the once in a decade change in the top job: Secretary General of the ruling Communist Party and its subsidiary government title of President.

The job will change hands for only the third time since the death of the country’s last supreme ruler, Deng Xiaoping, and the handover will come with an almost complete recasting of the CCP’s nine-person Politburo Standing Committee, which increasingly rules China by consensus: seven of the nine positions will change.

But the trickle-down effect of this power shift is much bigger.

“This leadership change really affects hundreds of posts,” Lowy Institute East China Program director Linda Jakobsen says.

“It’s not just the nine who will be chosen for the Standing Committee. It filters down to the state council, the government ministers, the provincial governors and party secretaries; everyone is going to be affected.”

She says decisions at the bureaucracy’s top layers will be postponed or stalled until the change is made in October.

“Everyone is in an expectant state of mind, waiting to see who will get to the top: it affects your boss, your boss’s boss and your boss’s boss’s boss if you are in any part of the higher echelons of the bureaucracy.”

Not only are the Chinese awaiting this transfer of power, which will play a key role in determining all economic and strategic choices, but for a world anxious about the debt crisis in Europe and the stagnation in the US, few things matter as much as what China does this year.

The country’s remarkable near 10 per cent annual growth over the past decade has helped underpin the international economy and prop up the ailing developed world during the first phase of the economic crisis that began in 2008.

But the world’s dependence on China is now even more acute.

For no country in the developed world is this truer than Australia, which is linked to China in a way not thought possible even a decade ago. In 2010, China passed Japan as Australia’s biggest trading partner, with trade now worth $105 billion a year, and China became Australia’s biggest export destination, a position of dominance that also continues to increase.

There are many other facts that show the scale of the connection.

Australia is one of China’s prime destinations for foreign investment; China is by far the largest source of students (the second biggest export sector after mining); China takes about 70 per cent of Australia’s wool clip, part of more than $5bn in agricultural exports; China helps to underpin urban and even some rural property markets; and last year, China passed Britain as our most valuable source of tourists, with numbers expected to reach 1 million a year by 2020.

Australia is now more dependent than any other country on China (bar possibly Taiwan) and its continued economic growth.

When the global financial crisis hit three years ago, Beijing reacted by pumping billions of dollars into Australia’s economy, generating an investment bubble and adding to inflation, but the sustained domestic demand in China has helped Australia to avoid recession.

Once again, Chinese policymakers face a similar challenge as growth slows because of the global meltdown and government-led efforts to tackle inflation.

But this time, as Beijing considers whether to again increase spending, it is more tightly constrained in policy options, not just by the coming leadership change but by the rising power of elite interest groups.

At the political and business level, the demand is for economic stability and continued strong growth rather than reform initiatives that could slow the behemoth.

Yet without reform, China risks being stuck in the middle-income trap or experiencing a Japan-style “lost decade” or two.

Rapidly rising wages are signalling that China may no longer be able to compete for the low-margin, high-volume manufacturing that has driven its rise in the medium term, but a lack of ability to innovate, or properly educate enough of its people, could see it fail to climb up the value chain to provide high technology and premium services.

This would leave it stuck somewhere in the middle. Many observers also fear that China may follow Japan’s trajectory of booming exports, over-investment and expensive property markets, which led to decades of wallowing in a stagnant economy.

But signs for reform are not promising.

Senior leaders took part last week in the National Financial Work Conference, a forum held every five years which in the past has initiated major reforms. This time, little of consequence emerged, apart from a heightened sense of caution, observers said.

Political reform, too, appears to be off the table.

“There are loads of people in the system who would like to see change, but overriding that will be the concerns about the political consequences,” says David Goodman, who is acting director of Sydney University’s China Studies Centre and Professor of Chinese Politics.

“That will stop them doing it and that becomes a self-fulfilling prophecy. Increasingly, there are very few people in the system who, if you ask them individually, will say yes, we like it; most of them say no, we need to change.

“Collectively, they know they can’t do it and that is problematic and the biggest conundrum of all.

“Collectively, they don’t want change but individually they do. The only way the system works is that the only thing they can agree on is no change. It’s a serious problem.”

Economic statistics due this week are expected to show that China’s quarterly GDP growth has slipped below 9 per cent for the first time since 2009.

“Slower export growth and weaker domestic property construction were likely the main factors,” UBS analyst Wang Tao says. And there is worse to come.

The problem is that the crisis in Europe has coincided with Beijing’s efforts to cool China’s property market, and figures released last week show property sales in the capital fell by 60 per cent over the New Year period compared with the same time last year.

“With exports weakening more visibly and property activity entering wintry conditions in months ahead, we expect GDP growth to slow further to 7.7 per cent in Q1 2012,” Wang says.

The government has already moved to loosen monetary policy, cutting the Reserve Ratio Requirement (the percentage of its funds a bank must hold in cash) at the end of last year.

Analysts argue that lower growth will trigger more visible policy easing, which will lift domestic investment and economic activity from the second quarter of this year.

Australia’s dependence on China policy was underlined last month when federal Treasurer Wayne Swan said: “Early in 2011, they (the Chinese) tightened monetary policy and they are now loosening it. They have plenty of policy firepower to respond if they’re adversely affected by Europe. We’re right to be concerned about particular vulnerabilities in the Chinese economy, but every piece of analysis I get gives me confidence they will continue to manage whatever domestic challenges they have in a prudent way.”

Market consensus is that although commodity prices will not reach the record highs they hit last year, they will remain strong, especially for Australia’s biggest exports, iron ore and coal, both of which China will continue to consume in increasing volumes.

The economic connection runs deep but for the first time in Australia’s history, its largest trading partner is not a defence ally: China is increasingly wary of US moves to bolster its presence in the Asia-Pacific region. For the US, the challenge China represents is twofold: the two are inextricably linked economically; and China is muscling up a military that will eventually threaten US dominance in the Asia-Pacific and perhaps beyond.

The two largest economies have a long-standing trade imbalance that distorts global markets.

American complaints about China’s refusal to revalue its currency are only likely to grow in a US presidential election year, although China’s slower growth, particularly in its export sector, will affect the rate at which the yuan will appreciate.

“The value of the yuan will fluctuate greatly this year but ultimately appreciate by 2 per cent to 3 per against the US dollar,” the China Daily predicts.

Deutsche Bank economist Ma Jun says the bank expects the yuan to appreciate by 3.5 per cent against the US dollar, but most of the appreciation will take place in the last three quarters of the year.

Last year, as Europe stumbled, China refused to underwrite its recovery through investment in bonds, but it is now starting to put money into bargain basement big-ticket items: last month, it struck a $US3.5bn ($3.4bn) deal for a 21.75 per cent stake in Portugal’s largest utility, Energias de Portugal. This was China’s biggest offshore transaction on record.

And while the European Union begs China to buy a slice of its economy, China’s neighbours are keen on it butting out.

In the past 18 months or so, China has turned up the volume in its claims to vast sections of the South and East China seas, throwing Beijing into conflict with more than half a dozen nations. This had the unintentional and unwanted effect of sending some countries into the arms of the US.

“Among Chinese analysts there is a consensus that China did not understand how poorly China’s motives are understood and they have decided that is the reason for the turmoil in foreign relations China has experienced in the past two years,” Jakobsen says. “There is definitely an acknowledgment in Beijing that China did not think enough about the consequences of its actions and how this would be interpreted.

“There is a view that the US is intent on encircling China and is encouraging its neighbours to band together to resist China. It’s worrying if this kind of situation gets out of control.”

Ahead of its leadership change, the CCP will be obsessed with maintaining its united public face as it continues its pogrom against activists and dissidents. It has jailed two well-known critics in recent weeks and author Yu Jie fled the country with his family last week.

More broadly, the party’s thought police continue to ramp up censorship of the internet as they struggle with the wildly popular Twitter-like micro-blogging sites know as weibo.

The party itself is divided over who to put in the top jobs and which path the country should follow to secure the survival of a regime that has proved to be remarkably flexible in the past.

Vice President Xi Jinping is all but certain to take the position of Secretary-General of the Chinese Communist Party from Hu Jintao, Executive Vice-Premier, but the remaining seven positions in the elite Standing Committee of the CCP’s 24-man Politburo are up for grabs.

For 500 million or more Chinese, the Spring Festival will hold the ever present hope of real change, of improving lives eked out on $1 or less a day.

While the CPP of the post-Mao Zedong era has been lauded for improving the lives of hundreds of millions, the breakneck speed of change and the party’s insistence on retaining its grip on every organ of government are beginning to take their toll.

The number of so-called mass incidents, or localised protests or riots is on the rise.

The government stopped issuing statistics in 2008 and some estimates put last year’s figure at 180,000 so-called mass incidents.

Although many protests are very small, more and more are making it into the public arena.

With all this on its banquet table, little wonder that everyone is watching China.

http://www.theaustralian.com.au/business/economics/year-of-the-dragon-heralds-power-shift-in-china/story-e6frg926-1226244874187