The Grand Plans of the Chinese Communist Party

It’s all about elections, non-elections, and power struggles. And as one election ends, another non-election comes into view. The Western media is all over a speech given by China’s outgoing President Hu Jintao at the 18th National Party Congress of the Communist Party of China. As you probably know, the Chinese leadership is gearing up for a major handover of power in the next week. The streets of Beijing will be running with rhetorical drool.

This was a speech worthy of a campaigning Democrat or Republican…full of rhetoric and grand plans, but completely devoid of detail.

Funnily enough, much of the Western commentary on the speech seemed surprised that Mr Hu reasserted the primacy of the Communist Party, and interpreted it as a return to conservatism and a rejection of reform.

We would argue that it couldn’t be any other way. This past year has been one of the most tumultuous in history for the Communist Party. Rapid economic growth and the unintended consequences of an historic credit boom have weakened the Party’s grip on power like never before.

The huge amount of credit flowing through the system incentivised corruption and the creation of ‘fiefdoms’, from which party members could establish and build power bases. This is what happened with Bo Xilai, party boss of Chongqing province. But he got a little too big for his boots and is now facing jail time.

This blatant corruption in the upper echelons of the Party, as well as the uneven nature of China’s breakneck economic growth, has radicalised the population to an extent not seen in decades. Increasing protests at a local level have been an unwanted side effect of China’s growth.

So it’s no surprise that Mr Hu wants to bring the focus back on the party and its ability to control and manage China’s economic destiny. In his speech, he said the party and government ‘should steadily enhance the vitality of the state-owned sector of the economy and its capacity to leverage and influence the economy.’

He also unveiled a target to double per-capita incomes by 2020, implying China will achieve 7% growth (on average) over the next eight years. It’s the sort of feel good targets any politician would unveil on the way out the door (Hu will hand over the Presidency next week).

Continuing with the ‘we should’ theme, Mr Hu wants to ‘unleash the potential of individual consumption’ and liberalise China’s currency and interest rate markets.

These are almost mutually exclusive wishes. As we pointed out in our China White Paper, increasing consumption will come at the expense of investment spending. China’s household sector has inadvertently financed its infrastructure boom. So turning China’s savers into spenders would take away the fuel for the investment spending.

Economic rebalancing isn’t just a case of saying ‘we should do this or that’. It involves trade-offs and real movement of capital, which has flow on effects and unintended consequences.

This is a momentous occasion for China’s outgoing and incoming leaders. Over the next week they’re going to say whatever sounds acceptable to their people and state and Western media will duly report on it as if it were gospel.

But as the old saying goes, actions speak louder than words. And as China’s new leadership will find out in the next few years, actions are much harder than words, too.

Greg Canavan
for Markets and Money

From the Archives…

A Deflationary Conclusion to China’s Bubble
2-11-2012 – Greg Canavan

When ‘Nanny State’ Deficits Becomes Unviable
1-11-2012 – Marc Faber

Why Economists Are Jackasses
31-10-2012 – Bill Bonner

Riding out the Storm
30-10-2012 – Dan Denning

What We Couldn’t Say on CNBC About Economic Stimulus and Other Things
29-10-2012 – Bill Bonner

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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re China…

meet the new boss
same as the old boss…

The Who ” Won’t Get Fooled Again ”
1971 smash hit

who’s fooling who in China?
it’s the biggest credit bubble on the planet…

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