In the last of our series of blog posts on some of the major challenges facing China’s economy over the next 12-18 months, we look at politics.

 

ChinaTableWorldBank.jpg 

By John Richardson

THE outcome of the battle over China’s economic direction is, of course, of crucial importance to the world economy.

It would be comforting to assume that all you have to continue to do to predict chemicals demand growth in China is to gather and input historic data into a spread sheet and trust that this largely reflects what is going to happen in the future.

The “big picture stuff” is quite often ignored because thinking through and compiling scenarios based on different political outcomes is an immensely complex, difficult, uncomfortable and even risky process.

Thus it is easier to ignore the bigger picture on the assumption that China’s politicians “always get it right”.

But, as the country approaches its once-in-a-decade leadership transition, which takes place from October this year, there is a huge risk of China getting it wrong.

Chemicals companies must, therefore, do this kind of analysis, as BASF indicated in June.

Major economic reforms, vital to wean the country of a wasteful addiction to investment, may fail if politicians follow the path of least resistance. Implementing the reforms outlined in the extremely ambitious 12th Five-Year-Plan (2011-2015) would involve tackling well-entrenched “vested interests”, such as the state-owned enterprises (SOEs) and many of the politicians themselves who have benefited from corruption.

In February, the World Bank, in a major report on China warned: “China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the ‘middle-income trap’. (see the above chart on the middle income challenge, which we also discuss in chapters 6  and 12 of our free e-book, Boom, Gloom & The New  Normal). 

The report outlined reforms that need to take place, including a transparent financial sector (no more ‘soft loans’ for favoured SOE projects) and more innovation in areas such as green energy.

It therefore seems very worrying that Beijing’s response to the global economic slowdown has involved sanctioning more industrial capacity, including in the already oversupplied steel sector.

This might deliver a short-term boost to growth through, for example, more jobs in building these factories, but adding to oversupply will likely increase bad debt and deflation problems, while raising international trade tensions.

Another risk is that China will be tempted to take the brakes off the housing sector, in response to an ever-weaker world economy.

This would further add to bad debts when the re-inflated real-estate bubble eventually goes pop. It would also widen the gap between the rich and the poor, thus undermining another key part of the 12th Five-Year-Plan, and would represent a major threat to social stability.

The current leadership might be just playing for time by doing just enough to get to the end of their terms in office without major mishaps, suggests fellow blogger Paul Hodges.

This would place a great deal of pressure on the new leaders to press ahead with reforms, assuming that they are so minded.

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