China faces major shift under Xi

It has been the big question of the year for China: Will the world's second-biggest economy undertake a serious policy of reform under its new leadership?

The need for change is evident as the old cheap-labour, cheap-­capital, export-driven model runs into the sands of time.

Workers no longer come so cheap, capital costs more and export markets are not what they used to be. This is why many commentators had high hopes of significant reform initiatives from a key meeting of the ruling Communist party that ended last week.

Any big changes would have serious implications for the world economy, which relies for much of its growth on the last major state under communist rule.

Immediate hopes were dashed by an anodyne statement that was long on intentions but short on detailed policy proposal.

Whatever the exaggerated hopes from investment bank analysts and media writers, the plenum of the party's central committee held in a military complex in Beijing was never going to come up with a blueprint for change.

Xi's prime concern
Yet between the complex lines of the statement are pointers to how the leadership intends to move — and to the counter­vailing pressures on party chief Xi Jinping and his colleagues.

For Xi, the most powerful Chinese figure since the paramount leader Deng Xiaoping, the prime concern is to buttress Communist party power, which he sees as having been sapped by elitism and corruption.

As a good Leninist, he puts political power first and he knows that the structural economic reforms his country needs — to land ownership, the labour system, financial markets, state enterprises and resources pricing — would compromise the growth the regime needs and would risk boosting inflation.

So the plenum struck a cautious course to avoid shocks to the system. Its final statement disappointed advocates of swift alterations — though a further document may put flesh on the deliberations in the coming weeks and there will be further discussion at the annual Economic Work Conference next month.

The key element is that Xi and Prime Minister Li Keqiang believe they have time to implement the changes they know China needs.

But Xi wants to be sure of his political power before he embarks on changes that would bring clashes with vested interests, especially the state-owned enterprises and those who have done well financially out of the present system.

Leader remains the number one priority
Throughout, the political consideration of maintaining and strengthening the authority of the party and its leader remains the number one priority.

The plenum's single concrete decision — to create a national security committee — went in this direction and chimed in with Xi's efforts, described in the communiqué, to bring the police and legal apparatus under his own control.

If there was any doubt about the primacy of party politics, it was dispelled by the admonition in the opening paragraph of the statement issued at the end of the four-day session to "hold high the great banner of socialism with Chinese characteristics".

Behind the usual phrases and rhetoric — some dating back 20 years — there were statements of intent that should be taken seriously.

First was the statement that the reform of the relationship between the government and the market would be "deepened" to allow the market to participate more actively in the allocation of resources, striking a positive note for the long-term sustainability of economic growth.

The misallocation of resources at the hands of the state has proven a major stumbling block in the much-needed consolidation of heavy ­industry.

Results of lack of factor price reform
The lack of factor price reform has led to extreme wastefulness of natural resources, which has created a devastating impact on the environment — an issue that political leaders are beginning to realise they must address.

The guidance date of 2020 for bringing about change mentioned in the plenum communique reflects the long-term thinking China's leaders prefer on such occasions — though they can be as short-term as any Western politicians in their immediate responses to problems and preside over a system that is far less efficient than their admirers pretend.

Miracles can happen — the sky over Beijing was clear and blue throughout the meeting.

But Xi has nine more years at the helm and will take advantage of that to move at his own pace, balancing political and economic needs. How will it turn out? Not even Xi knows. — © Guardian News and Media 2013

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