China And Xi Jinping: The Five Big Challenges You Must Understand

By John Richardson

THE above slide, from my speech at this year’s Gulf Petrochemical Association Forum, is a summary of much of the analysis on this blog over the past 12 months. This is another of my print-out-and-keep guides. Please pin to your chemicals company boardroom wall as you plan your scenarios for China.

In the centre of my five big challenges is of course Xi Jinping whose authority to get the job done has been greatly increased following last month’s crucial 19th National Party Congress meeting.At the same time though, the pressure on Xi and his reformers is sure to build. This is the result of of the expectations for success that this increased authority brings, and the scale and complexity of what needs to be achieved. Do not underestimate the scale and complexity of what lies ahead for China, and thus the consequences for growth if reforms go wrong.

Here are the five challenges in detail:

  1. Xi and his fellow reformers need to deal with overbuilding in petrochemicals and other industries such as steel and cement. As this  FT article indicates, big progress has been made during 2017 this critical area as China tries to deal with its bad debts.
  2. At the same time, Xi and his core team need to find a way of narrowing the income gap between poor China and rich China. Poor China is its northern and western provinces where per capita GDP is way behind its rich eastern and southern provinces. How can this be achieved when jobs are being lost through the closure for economic reasons of inefficient petrochemicals, steel and aluminum plants and coal mines?
  3. There is another driver behind industrial restructuring and that is the environment. How can Xi again balance growing pressure from China’s rich middle class for a cleaner environment and the pressure to raise income levels in northern and western provinces? Close petrochemical and steel plants down etc. and China will improve air quality, thus satisfying its coastal rich middle class. But this could lower income levels in poor China as jobs in lower value, basic manufacturing are destroyed. Does he face an impossible balancing act?
  4. Meanwhile, China plans to spend vast sums of government money on innovation as it tries to climb up the manufacturing value chain in order to escape its middle-income trap. Perhaps vast sums of government money is the answer. The state-driven approach to financing start-ups in sectors such as renewables, mobile internet technologies and electric battery vehicles might prove to be very successful. But the risk of failure is clear. What if this money is largely wasted, and what if China also cannot access the overseas technology support that it needs because of trade and geopolitical tensions? China has to be successful in this critical area if it is to avoid economic stagnation.
  5. And unlike the US, China has no chance of being energy independent. It has to secure the hydrocarbons at the right price and in the right quantities if it is going to sustain strong economic growth.

And remember: Success will largely depend on whether or not China can implement its One Belt, One Road initiative.



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