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Chinese Uncertainty Is Always Certain

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The political tea leaves haven’t yet been read fully in China, but the oracle seems to have spoken on the economy: it’s not going well, and a new leadership team expected to take over in November will have a difficult time in managing a slowdown that has started to hurt the world’s second-largest economy.

The political change — the Communist Party is set to promote Vice President Xi Jinpeng and Vice Premier Li Keqiang — is clashing with a need for a structural shift in the country’s economy which, after a long period of growth fuelled by exports, is showing signs of wearing out due to a slowdown in demand in key Western markets.

A former colleague, who spent many years in China during the years when Deng Xiaoping was transforming that country, once said everything in the Middle Kingdom was uncertain because nothing could be certain even after it happened. Xi’s sudden disappearance for two weeks last month when he cancelled meetings with visiting foreign dignitaries, including US Secretary of State Hillary Clinton, raised speculation about his future. He reappeared in the state media as suddenly as he had disappeared.

The new leaders, who are set to replace President Hu Jintao and Premier Wen Jiabao, will inherit a far messier environment than their predecessors. Not only has the economy slowed, China is facing labour protests, social unrest and high wage inflation. Political corruption has forced the party to come down heavily against heavyweights like Bo Xilai who were once seen destined to make it big.

Let’s look at the economy first. Whereas Hu and Wen inherited an economy that was growing at 9 per cent a year after a rocket-speed double-digit growth, Xi and Li are staring at a much lower 7.5 per cent growth. And there is a view that economic growth could drop to as low as 4 per cent if China doesn’t correct the internal structural problems quickly and the external environment (exports growth) continues to be sluggish.

The economy has slowed down for six consecutive quarters and domestic consumption has been pared by the government’s effort to curb a property bubble. Industrial production in August grew at the slowest pace in three years and direct foreign investment has fallen in the past 9 of the 10 months.

A recent territorial dispute with Japan over islands in in the East China Sea could impact bilateral trade worth nearly $350 billion, as protests that many believed were government sponsored shut down factories of Japanese companies and brought tens of thousands on the streets. Given the historical baggage the two countries share, things could only worsen if not controlled.

Despite a two-step reduction in interest rates, easing of loans and a tax slash for small businesses the economy has not been able to pull itself out of the morass it finds itself in for the first time in decades. A new stimulus package on the lines of the one introduced in 2008 could probably put some life into the economy, but that may not happen until after the change in the leadership.

And that brings us to the politics. In recent months China has been roiled by corruption scandals at the highest levels and the party this week formally sacked former commerce minister and party chief of Chongqing. He has been accused of serious graft and other misdemeanors after his wife was sentenced to jail on charges of murdering a British businessman.

Bo’s fate had kept the political rumour mills churning and the feeling was that the leadership was so immersed in cleaning the house that it had quite forgotten about the economy. That may or may not be true, but what is certain is that there has been lack of action, mostly believed to be because of a lack of consensus at the highest levels.

The change might come after the new leadership consolidates power. The initial political indecision on part of Xi and Li might just add to the woes of the economy, which is unlikely to hear positive news from the United States of Europe in a hurry. The vast state-run industry is bleeding China, and a demographic shift that will see the number of young factory workers fall sharply in the next decade is hugely worrying.

In the next week more than 660 million Chinese are expected to travel to their rural homes from China’s humungous cities as the country shuts down for national holidays. Most will return to the factories they work in weeks before the Communist Party meets to formally announce the new leaders.

They would be watching the developments as closely as the international community. The delay in the start of the party congress, which usually takes place in October, to two days after the US presidential election indicates the critical interest Beijing and its current and new planned leadership have in the world’s biggest economy – and a huge market for Chinese exports.

The U.S. result will help China and its Communist leaders decide the policy course better – both from the economic and political point of view. They would know what to do if Obama returns to the White House; his loss would mean new leaders at both ends. In short, Presidents of China and the United States would not only need to consolidate their power bases but they would also have to get to know each other.

It would, therefore, take longer for tea leaves to be read, which may not be good for the world at large.

(The columnist is president, public affairs, Genesis Burson-Marsteller, India, and former Editor, Khaleej Times, Dubai. He takes a deep interest in China. The views are personal)