STANFORD, CALIFORNIA – Political leadership transitions typically signal either a change in direction or continuity. But the mere prospect of such a transition usually postpones some important political decisions and freezes some economic activity, pending the resolution of the accompanying uncertainty.
China’s decennial leadership transition, culminating at the Chinese Communist Party’s 18th Congress, is a case in point. And, while many will remember when a Chinese leadership transition was a political and cultural curiosity that had few direct economic implications for the world’s major powers, those days are long gone.
China is now the world’s second-largest economy, and, despite a recent slowdown to 7 percent annual GDP growth, it is outperforming all other major players. It remains the vital assembly center of the global supply chain for many manufactured goods, such as computers and cell phones, enabling lower prices for the world’s consumers. That has made China a key trade partner for the United States, most European countries and many other economies, in addition to placing it at the center of intra-Asian trade and supply-chain dynamics.
Moreover, China sits on roughly $3.3 trillion in foreign-exchange reserves — much of it in dollars, but also in other major currencies — owing to its large trade surplus in recent decades. It helps to finance other countries’ trade deficits and domestic investment (many of its beneficiaries have large budget deficits that decrease national saving below domestic investment).
Deng Xiaoping’s reforms ignited the most rapid economic improvement in human history and, with it, the emergence of a large and growing middle class. That makes China an important market opportunity for a broad range of foreign firms — including car producers, technology suppliers, financial institutions, energy companies and agricultural exporters. And Chinese firms — too often state-owned — are seeking greater investment opportunities abroad in major industries, particularly energy.
A byproduct of China’s spectacular growth has been rising economic tensions with other countries. China’s exchange-rate policy and its bilateral trade surplus with the U.S. were major issues in America’s presidential election, and concerns over Chinese foreign investment are ubiquitous. The World Trade Organization upheld America’s duties on Chinese tires, and Canada has extended its review of the China National Offshore Oil Corporation’s bid to acquire Nexen, a Canadian oil and gas producer. Despite China’s WTO membership, many foreign companies face restrictions on expanding in China or must cooperate with a Chinese company.
The Chinese, for their part, complain about foreign trade practices and are taking some cases (for example, a long-running dispute with the European Union over solar panels) to the WTO, where cases brought against China by other countries are proliferating. All sides, however, must bear in mind that China is too important to the global economy and trading system to allow these disputes to spin out of control.
Meanwhile, China’s economic slowdown — the result of global weakness and efforts to cool the country’s inflation and overheated asset markets — threatens to slow the pace of job creation for the millions moving annually from rural poverty to greater prosperity in China’s expanding urban areas. And it comes at a time when the pace of market opening and reduction of state control has slowed, following substantial reforms under former President Jiang Zemin and former Premier Zhu Rongji. While outgoing President Hu Jintao and Premier Wen Jiabao struck reformist chords in public statements and in China’s 12th Five-Year Plan, many inside China — including, reportedly, Jiang — are disappointed.
Thus, incoming President Xi Jinping and Premier Li Keqiang are being watched closely for signs of what they will do. It is rare for a successor — in business or government — to usurp the current leader’s lame-duck status by tipping his hand, so no one can yet say with any certainty whether the new leadership will push for a reformist leap forward or seek to maintain the status quo.
In addition to a new president and premier, other members of the Standing Committee of the Politburo have been named and a vast array of ministerial positions are being filled. With China’s “up or out” system for senior leaders, those who are not promoted will be replaced. From the new governor of the People’s Bank of China to the Cabinet and leading regulators, the new cohort has an opportunity to move China forward by promoting competition, decreasing the power of state enterprises, boosting household consumption and reducing reliance on exports.
Earlier this year, the China Development Research Center of the State Council and the World Bank issued an excellent report on opportunities for, and challenges to, China’s policy agenda. They concluded that China should complete its transition to a market economy with land, labor, financial and enterprise reforms. Opening markets to greater competition and rebalancing the roles of government and markets is the most promising strategy to achieve high-income status in the coming decades. It would be hard to find a better framework for Xi and Li as they put their imprint on China’s economic policy.
In particular, Chinese consumption as a share of GDP is very low by international standards and relative to the historical experience of other countries at a similar stage of development. Two important options for raising consumption are social insurance — which is developing, but too slowly — and reducing state-owned enterprises’ huge savings by paying dividends to citizens, much as privately owned companies routinely pay dividends to shareholders.
Managers, workers, consumers, investors and governments in every corner of the world, many reeling from their own economic problems, have a lot riding on China’s new leadership navigating reform sensibly, now and in years to come. The world will soon know more about what to expect.
Michael Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of George H.W. Bush’s Council of Economic Advisers from 1989-93. © 2012 Project Syndicate