January 21, 2014 2:57 pm

China: Xi puts faith in reforms as growth slows

China has entered 2014 on a wave of domestic optimism thanks to a commitment from its communist leaders to overhaul its flagging economic model and enhance its status on the global stage.

President Xi Jinping, after just over a year as leader of the world’s most populous nation, has ruthlessly and skilfully consolidated power and launched an ambitious economic reform agenda as part of his plan to realise the “Chinese dream” of a “great rejuvenation”.

His harsh yet selective crackdown on corruption and dissent, and his emphasis on enforcing Communist Party discipline, have left him looking like the most powerful leader in Chinese politics since Deng Xiaoping, who launched market-orientated reforms in the country in the early 1980s.

Mr Xi’s complete rejection of liberal democratic values and explicit reassertion of the authoritarian model have left advocates of human rights and proponents of democracy deeply disheartened.

But supporters of economic and financial reform have been encouraged by Mr Xi’s ability to concentrate power in his own hands and to overcome bureaucratic opposition to much-needed changes to the Chinese growth model.

“I’d give Xi Jinping an A-grade for the last year because of his ability to assert control over the government and the Party at the same time,” a senior western banker told the FT. “This is absolutely necessary if he is really going to push reforms as he has suggested he will.”

At the end of a crucial, closed-door meeting of the Party nomenklatura in November, Mr Xi’s economic agenda was spelt out in a lengthy document ranging from an easing of the decades-old one-child policy to tax reform.

Much of the actual reform content was not radically different from plans put forward by Mr Xi’s predecessors but within the Party and the country as a whole there is far more faith in his ability to deliver.

President Hu Jintao and Premier Wen Jiabao ruled China from 2002 until late 2012 during a period of double-digit economic growth but they have been accused by powerful Party figures of overseeing a “lost decade” of missed opportunities to put the country on a more sustainable path.

With China’s growth rate grinding inexorably lower, most people, probably including Mr Xi, feel time is running out for the old Chinese model, based as it is on credit-fuelled property and infrastructure investment, and highly polluting low-cost manufacturing.

Most forecasts are for the economy to slow further this year, with a consensus figure of about 7.4 per cent annual growth in 2014, compared with an estimated rise of 7.6 per cent in 2013.

If that lower prediction proves right, it would be the slowest pace of growth in China since 1990, when the country was still under international embargo as punishment for the 1989 Tiananmen massacre.

But even as growth drifts down, the aggressive implementation of reforms will boost market sentiment and support for the government as it cuts red tape, liberalises interest rates, overhauls the financial and fiscal sectors, allows more market-based pricing, explores land reform and streamlines the state-owned enterprise sector.

The economy will also probably receive help from an unlikely quarter, as strengthening recoveries in the US and Europe, still China’s biggest export markets, provide support for the enormous Chinese manufacturing sector.

The more worrying aspect of Mr Xi’s muscular style of leadership comes from his apparent ambition to be more assertive on the world stage, particularly as Beijing appears to be developing a kind of Chinese version of the Monroe doctrine, in which the US adopted an aggressive attitude to countries interfering with its neighbours.

An escalation in posturing with Japan over a small group of uninhabited islands in the East China Sea has the very real potential to blow up into a direct military confrontation in the event of an accidental collision between air forces or navies.

The authoritarian stance Mr Xi has taken at home also has the potential to backfire if his government were confronted by a major economic or social crisis.

As well as going after powerful corrupt “tigers” and ordinary corrupt “flies” within the Party ranks, Mr Xi has overseen one of the harshest crackdowns on civil society, political dissent and free speech in a decade.

He appears to have made the calculation that the Party’s political survival can best be assured with economic reforms that lead to continually rising incomes combined with harsher repression and tighter control over public discourse. He may be right, especially if the economic reforms are as successful as many analysts hope they will be.

But an increasingly networked, well-informed and demanding populace will make it ever harder to strike that balance. And if Beijing cannot pull off a smooth economic transition Mr Xi may find himself wishing he had spent more time on establishing a more durable political system.

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