New Leadership: Characteristics

Very significant turnover: 64% of Central Committee; 15 of 25 in Politburo; 5 of 7 in the Standing Committee Standing Committee reduced from 9 to 7 Average age of Standing Committee = 63; 5 will have to step down SC members chosen on basis of age and experience rather than policy; favorable to Jiang Zemin Politburo 3 characteristics:
Provincial experience key (19 of 25) Decline of central ministries/technocrats (1 of 25) Rise of the princelings, majority of the Standing Committee

What Might they Do?

We do not know!! Impact of Bo Xilai affair

temporarily took eye of the economy Prevented the new leadership from outlining any positions

Third Plenum end of next year will be first clear policy indication
Need to take action to avoid serious problems in a decade or so Major challenges to be faced:

Economy: restructuring drivers of growth

Society: aging society, inequality Politics: corruption

Economy: Longer-term Development

12th five year program commits to realize the original objectives for the economy set out by Hu-Wen in 2003-04, none of which have been realized
Reduce dependency on the two main drivers of growth: investment and export demand Longer-term goal to increase domestic consumption and domestic productivity growth Road map for accelerating changes in the mode of economic growth Shift to consumption will over time further slow growth (34% of GDP) Investment in infrastructure and industry will remain important but little capacity for investment/GDP ratio to rise much further problem is not level of investment but rather ineffectiveness 2010, capital stock per person only 20% of US at PPP Same limited capacity for exports to expand much more Problem of savings rate with respect to boosting domestic consumption

New Growth Model? Strategic Industries

Investment in Strategic Emerging Industries 7 industries with 14 trillion yuan to be invested to raise contribution from 5% of GDP to 8% by 2015 and 15% by 2020
Biotechnology New energy High-end equipment manufacturing Energy conservation and environmental protection Clean-energy vehicles New materials Next generation IT

From their work portfolios, you can work out which senior leader oversees which set of funds

New Growth Model? Political Opposition

Incentives for local officials are growth oriented

Only Beijing and Shanghai have announced growth figures close to the target Many provinces have announced growth targets near 13%

Coalition of vested interests that have blocked reforms

Export and import competing industries Coastal provinces Real estate and construction industries Chinas commercial banks

Growth is sustainable but it is deeply unfairneed to undergo the tricky transition from a mobilization to an efficiency focus

An Aging Society

Negative effect of higher dependency ratios and greater expenditures on elderly care By 2050, China will age on average 13.8 years (US 3.6) Will be the first society to grow old before it grows rich

2040 peak population of 1.54 billion

Already officially an aging state with over 10 per cent of the population over 60 4-2-1 family structure Consequences
Significant pension obligation to deal with Significant increase in medical costs Lower fertility rate = lower domestic savings rate but a higher return to labor

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Corruption

Received great stress at the Congress and in Xis post-Congress comments Can it be combatted?
In-house party affair Leading family benefits from current system Vested interests: 90% of Chinas wealthiest people are officials or party members; 90% of millionaires are children of high-ranking officials 2011 survey: only 6.4% thought government would seriously tackle corruption

Consequences

Policy will:
Confirm continued economic growth with more attention paid to social equity and the environmental impact Populist concerns reflected in increased state spending on rural schools, clinics and infrastructure Elitist concerns reflected in adoption of the Property Law and more funding for college scholarships Joint concerns reflected in significant military and state spending Protectionist measures for Chinese industry and potentially a less hospitable environment for foreign enterprise For the economy more specifically:
Continuation of support for export-led growth; greater attention to boosting domestic demand; improve domestic innovation; capture larger share in value added in global production chain; some redirection of investment to NE and West; Bohai region as major focus for development

Consequences

The business environment may become tougher and foreign companies will have to be better at framing their activities acceptable to the leaderships future aims It will be important to develop productive relationships with rising members of the 5 th Generation Opportunities exist for foreign businesses to tap into these priorities
Energy and raw materials access and security Advanced technology Developing Chinese global brands higher quality growthlife sciences, R&D, university development Energy with respect to efficiency and pollution control projects Internationalization of large SOEs in key sectors Opportunities to serve new secondary, inland cities and new markets created by urbanization and improved infrastructure and logistics

Possible Scenarios

A) Continuation of the status quo Financial/economic reform but little political adjustment Reconfigure interest rates for positive returns for household savings Abolition of hukou Introduction of a property tax Open up profitable sectors of SOE-controlled economy Moderate family planning program B) Democratic breakthrough (Taiwan/South Korea) C) Derailed democratic reform (Putins Russia) D) Harshened authoritarian rule (Latin America before democratization)