News / Asia

China’s Next Leaders Inherit Economy at Critical Crossroad

A man walks past portrait of communist party members on display outside Imperial Ancestral Temple in Beijing, China, November 12, 2012.
A man walks past portrait of communist party members on display outside Imperial Ancestral Temple in Beijing, China, November 12, 2012.
China's leaders have renewed pledges to boost the economy over the next 10 years during meetings this week in Beijing. But the economic challenges China's incoming leaders face are much more difficult than the challenges their predecessors faced a decade ago.

China’s aspirations for its economy over the next decade have come up repeatedly at the National Party Congress, in discussions on the sidelines of the meeting and in state media’s coverage of the event. It also figured prominently in the opening speech of outgoing President Hu Jintao.

In his address, Hu mentioned the economy 104 times in a wide range of contexts.  Economic development was mentioned more than a dozen times, as was former Chinese leader Deng Xiaoping’s catchphrase "gaige kaifang," or, "reform and opening up."

And while the risks China’s economy is facing were not mentioned as much, they were not ignored. Hu’s most direct comment on the challenges the country faces came when he said the opportunities and risks China face are not like anything before.

This year China’s economy is slowing to its slowest growth rate in more than a decade. And although the projected year-on-year growth rate of around 7.5 percent remains enviable to many countries, that is nearly half of what it was just five years ago.

Zhang Ping, head of China’s National Development and Reform Commission voiced confidence that the economy was improving, despite the slowdown. But he acknowledged there are still contradictions that need to be addressed.

Zhang says that China still lacks a balanced, coordinated and sustainable development, and its growth model is very crude. He says that along with the weakening overseas demand, China still has excessive production capacity in several sectors.

"We still lack a balanced, coordinated and sustainable development, and our growth model is still very crude. And along with the weakening overseas market demand, we still have an excessive production capacity in several sectors," he said. "There are also structural problems that need to be adjusted. It will take some time to solve these problems. These contradictions are having some impact on the development of domestic economy."

China’s economic growth model has long focused on exports. Now, its leaders are trying to move away from that to focus on boosting domestic consumption - or moving toward an economy where domestic consumers lead the way. Unlike his predecessor, that will be a key transition that China’s incoming leader Xi Jinping will oversee, says Patrick Chovanec, a Beijing-based economist.

"And that is a difficult transition for any economy. But particularly one as large as China and he’s [Xi Jinping] going to be tackling that challenge. It’s a challenge that people have been talking about for the past couple of years, but very little progress has been made in actually making that adjustment and he’s going to have to tackle that at a time when that is going to translate into a slowdown in the Chinese economy at least in the short run," he said.

While there are some who point to recent economic figures such as rising factory output and consumer spending as signs of a possible recovery, others are not as optimistic. Skeptics say the slowing of lending at banks is a sign the economy may still face challenges.

Patrick Chovanec says that as bank lending slows, investors are turning to other products such as bonds, private wealth management vehicles and trust funds.

"There are some people who say well this is part of financial reform in China and this will all work out fine," he said. "I am more skeptical and to me what it signifies is that more and more of the funding for China’s investment led growth is being shifted away from relatively low cost low interest bank loans to alternative investment vehicles that are promising higher and higher returns on the same assets."

There is also the problem of so-called "bad debt" such as defaulted loans written off by creditors as a loss. Chinese banking officials have acknowledged that bad debt is rising, but they insist the situation is under control. Shang Fulin, chairman of the China Banking Regulatory Commission spoke at a news conference in Beijing this week.

Shang says bad loans have been on a rise this year mostly due to the difficulties in management of some industries. He says, however, that the overall quality of bank assets is stable and the risk is still under control. Shang says that with China’s bad loan ratio still below one percent, the country's bad loans are still far lower than the world’s major banks.

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