Column: Servicing Chinas growth

Written by Amitendu Palit | Updated: Jan 14 2014, 08:39am hrs
Last year was significant for China. The most important development was the change in the leadership of the Communist Party of China (CPC). The fifth generation of leaders under President Xi Jinping assumed office earlier in the year. Leadership changes in China are elaborate and complex processes. President Xi and his team were elected through a rigorous political exercise made more complicated by the factional dynamics within the CPC.

The new leadership is characterised by contrasts in its outlook. While economically it is expected to usher in advanced market-oriented regulatory changes, politically it is expected to remain conservative. These contrasts will influence Chinas attitude to global and domestic priorities.

Globally, China aims to increase its strategic influence both regionally and multilaterally. As in past, it would rely on its economic strength for upping strategic clout. In this respect, the new leadership encourages greater global integration. Such integration, unlike in the past, will not be driven primarily by labour-intensive exports and an undervalued exchange rate. On the contrary, services are likely to emerge as the focus industries for Chinas future growth. Chinas growth strategy for the next couple of decades will be marked by its emphasis on services, particularly finance, information technology and biotechnology.

The priority of the new leadership to integrate deeper with the global financial system is in contrast to the relatively less enthusiasm of the earlier leadership in this regard. President Xis team has taken up financial reforms as a priority. In typical Chinese style, domestic financial reforms are taking place in a calibrated fashion. China is proceeding on full convertibility of the yuan in the capital account in the Shanghai Free Trade Zone. Several such zones have been sanctioned by the 3rd Plenary of the 18th Central Committee of the CPC that was held in November. While sceptics have expressed doubt over the effectiveness of such Shenzhen-style zones in advancing financial sector reforms, Chinas intentions are loud and clear. Pushing domestic financial reforms and occupying greater space in global finance is top priority given Chinas objective to make the yuan a global reserve currency.

Aggressive domestic reforms for giving the Chinese economy greater market-oriented dimension will characterise

Chinas economic agenda in the near term. These reforms will be accompanied by emphasis on correcting inequalities and reducing corruption. Both have assumed alarming dimensions in China.

The big question is whether China will be able to achieve a more egalitarian income distribution and a less corrupt society while trying to become more market-oriented albeit with typical Chinese characteristics. Over the last 30 years, Chinas achievements have been spectacular; but the agenda it has set out to achieve now is probably the toughest for modern China.

The Chinese leadership is also showing signs of reversing fundamental decisions of the earlier generations. The most significant example is the relaxation of the one-child norm. This might have come from its conviction that China cannot afford to reach zero and negative replacement rates in population growth within the next couple of decades as it is projected to. Demography is an advantage that China is unwilling to give up given that most large countries are significant in world affairs in various ways. On the other hand, the new leadership has also firmly dispensed ideas suggesting it might introduce gradual political reforms. Politically, it is expected to be conservative with the quality of political freedom in the country hardly expected to undergo much change from what it is right now. Observers expecting President Xi and Premier Li to be as accommodating towards political reforms as they are towards economic reforms are likely to be disappointed.

The difference in outlook on economic and political reforms on part of the new leadership is a key example of the contrast characterising it. A similar contrast is visible in its attitude towards external engagement. On one hand, China is engaging actively in various international forums, particularly economic, for preserving and increasing its strategic spaces. Its role in the G20 is expected to become larger over time. It would be becoming equally active in different UN forums, including the World Trade Organisation (WTO). It is noticeable that, at Bali, China adopted an interesting posture, which was relatively low profile and hardly aggressive in championing the cause of the developing world. Clearly, China did not wish to get identified as a country holding multilateral trade to ransom. At the same time, it is working hard in preparing for the TPP, making a bid for entering the plurilateral trade in services agreement (TISA) outside the WTO and carving out a bilateral investment treaty with the US.

If all these, however, convey the impression that China is only honey and sugar in courting the outside world for external engagement, it is incorrect. China is not giving up territorial claims in its turfs. Nor is it going to agree to third party mediations in matters where it would wish bilateral resolutions. In these respects, the Chinese leadership has not refrained from projecting nationalistic postures. This is in marked contrast to its globalised attitude on external economic engagement.

Dichotomous political and economic postures of the new leadership make Chinas policies intriguing and worth watching. The new year should be exciting in this regard.

The author is a senior research fellow with the Institute of South Asian Studies in the National University of Singapore. He can be reached at [email protected] Views are personal