Wen Signals Status Quo in Final Congress Speech

China’s premier Wen Jiabao called for continued “reform and opening up” of the economy in his final policy address to the National People’s Congress on Tuesday. The speech lacked new policy prescriptions and was largely consistent with the prevailing language on the development of the economy as “key to solving all of our problems” and the government’s “central task” to advancing its cause.

In reforming the economy, the government fears the unforeseen consequences that looser controls could have for the Communist Party’s monopoly on power once the proverbial genie is let out of the bottle.

China is in the middle of a once a decade leadership transition with Wen and President Hu Jintao relinquishing their posts to Le Keqiang and Xi Jinping, respectively. The transition is occurring at a critical time as China has reached an inflection point in its economic development after three decades of unprecedented double digit growth. Read more “Wen Signals Status Quo in Final Congress Speech”

Whatever Wen Says, China’s Economy Not “On Target”

Shanghai, China at night, May 4
Shanghai, China at night, May 4 (Mariusz Kluzniak)

Chinese premier Wen Jiabao said on Tuesday that his country is on track to meet its 7.5 percent growth target this year and could utilize government stabilization funds to sustain economic expansion.

Growth in China has slowed for six successive quarters and investors fear that it could slide into a seventh in the third quarter of this year, despite two interest rates cuts and loose monetary policies that make it easier for banks to lend. Chinese factories are running at their slowest rate of expansion since May 2009. Growth forecasts have been cut repeatedly.

Wen, speaking at a meeting of the World Economic Forum in Tianjin, insisted, “China’s economic development trend is good. Economic growth still remains within the target range set at the beginning of the year and the economy is stabilizing.”

President Hu Jintao warned this weekend though that the world economy is still hampered by the “destabilizing factors and uncertainties” of the 2008 financial crisis.

China pumped $635 billion in its economy that year, a stimulus package thrice the size of America’s relative to gross domestic product. Last week, it announced a further $150 billion worth of infrastructure spending.

The investments have failed to significantly reduce China’s logistical costs — the International Relations and Security Network’s Andrew Sheng and Xiao Geng point out that logistical costs in China are 18 percent of production costs compared with 10 percent in America — and may have fueled a housing boom which, if it pops, could be the greatest setback im Chinese development since the Cultural Revolution.

The stimulus also failed to lift internal demand which Chinese leaders recognize must increase as the country is losing its cheap labor advantage to other Asian nations and will therefore be able to profit less from exports in the near future.

“Expanding domestic demand is a long-term strategic principle and basic standpoint of China’s economic development as well as a fundamental means and an internal requirement for promoting balanced economic development,” said Premier Wen in March. But in order to truly diversify the Chinese economy, the internal market should be further liberalized. State subsidies for and support of financial industries, real estate developers and other vested interests with allies in the Communist Party should be cut and welfare spending increased to enable the Chinese to spend more and save less. Both will be difficult to achieve in the months to come as Beijing prepares for a leadership transition that starts in October.

A slowdown in economic expansion could undermine the party’s monopoly on power. China’s burgeoning middle class has largely accepted the lack of political freedoms while the economy was booming. But for China’s leaders to maintain high growth rates, they will have to relax their grip on power. The main impediment to economic development in years to come is the state’s heavy hand in industry. Behemoth state-owned enterprises, central planning, a weak judiciary, insufficient protection of private property and intellectual copyrights stand in the way of a freer market economy which the party isn’t sure if it willing to accept anyway.

Bo’s Purge an Opportunity for China’s Modernizers

A guard in the Forbidden City of Beijing, China, April 16, 2009
A guard in the Forbidden City of Beijing, China, April 16, 2009 (Shreyans Bhansali)

March’s ouster of Chongqing party chief Bo Xilai from the center of Chinese power is proving to be an opportunity for reformist premier Wen Jiabao and his allies to sideline their hardliner rivals.

Before Bo, a local Communist Party boss who was on track to join the Politburo’s Standing Committee, composed of the nine most powerful party leaders, was purged two months ago for alleged abuse of power, five of his allies were expected to be elevated to the Central Military Commission, the body that controls the army. That number is presumed to have dropped to three or four. Read more “Bo’s Purge an Opportunity for China’s Modernizers”

Is a Divide Opening Between Beijing’s Leaders?

The normally private internal conflicts of the Chinese Communist Party spilled into the public sphere with the dramatic sacking of Chongqing party chief Bo Xilai on March 15. Subsequently, on the evening of March 19, rumors of a coup surfaced. Gunshots were reportedly heard on the edge of Zhongnanhai in central Beijing and military vehicles seen on Chang’an Avenue.

In addition to Bo’s ouster, exile websites report that Zhou Yongkang, a leading Politburo official and ally of his, had been neutralized by his rival, President Hu Jintao, who enjoys the support of the military.

Bo’s and possibly Zhou’s ouster expose a fierce struggle within the Communist Party over the 2012 succession of power in Beijing.

The dramatic sacking of Bo and neutralization of his allies marks a victory for the party’s liberal reformers and an official rebuke of Bo’s neo-Maoist “Chongqing Model.”

Premier Wen Jiabao and his allies saw Bo as a new Mao, a dictator who could threaten them and their families’ business interests.

Hu, Wen and their supporters employed a tried and true method for eliminating the upstart from Chongqing — corruption charges. Charges against Bo stem from the attempted defection of Wang Lijun, Bo’s recently demoted vice mayor and police chief, who fled to the American consulate in Chengdu, allegedly to seek asylum.

Later, while being questioned in Beijing, Wang reportedly provided authorities with incriminating material about Bo and his family. Read more “Is a Divide Opening Between Beijing’s Leaders?”

Chinese Leader Warns Iran Not to Close Strait

China’s premier on Friday warned Iran not to block access to the Strait of Hormuz and said his country “adamantly opposes Iran developing and possessing nuclear weapons.”

The words came as tensions are rising across the Persian Gulf and were unusually blunt for a Chinese leader. Wen Jiabao’s criticism of Tehran’s threats were well received by his Arab Gulf hosts however who fear Iran’s aspirations to regional leadership.

Wen was in the Middle East for a six day visit of Qatar, Saudi Arabia and the United Arab Emirates, three Sunni monarchies that are wary of Shia Iran projecting influence across the Gulf.

The Islamic republic is under increasing international pressure because Western nations suspect it intends to develop a nuclear weapons capability. China is among few countries that is recognized as a nuclear power under nonproliferation accords. Iran is a signatory to these treaties. A nuclear weapons program would be in violation of them.

The European Union and Japan announced this month that they would join the United States in a boycott of Iranian oil sales. The country is heavily dependent on oil revenue but its export market is limited. If Europe and Japan were to suspend their petroleum imports, it would cut Iran’s sales by roughly a quarter.

China is another major buyer of Iranian oil but its largest supplier is Saudi Arabia. The kingdom and its emirate allies have offered to expand production to make up for gaps if oil consumers won’t trade with Iran. Wen insisted that China considers its business ties with Iran independently of its diplomatic relations. He has little choice but not to. China imports more than a third of its oil and Chinese oil consumption grows by 7.5 percent per year. It needs to buy wherever it can.

The crisis in the Gulf coincides with mounting turmoil in the Sudan. Before South Sudan seceded last year, the country exported the bulk of its oil to China. The Sudanese oilfields are largely situated in the South but the export industry is controlled by Khartoum. It recently confiscated Southern crude exports as compensation for unpaid transit fees.

Although the civil war in Sudan formally ended with Southern independence there continue to be clashes along the border. Oil revenue is a source of considerable discord between the two governments. If there is a disturbance in Sudanese exports, it would force China to increase its dependence on Middle Eastern oil producers, including Iran. Chinese petroleum imports from Iran already surged by 30 percent last year.

Chinese Premier Talks the Talk, Urges Reform

Speaking to a largely foreign audience this week, Premier Wen Jiabao reiterated his commitment to reforming China’s political structure and welfare state. Although Wen’s reform agenda appears to have gained little traction, the fact that he persists in speaking out about the shortcomings of the Chinese model of government suggests that there may be a battle going on behind the scenes that could affect next year’s change in leadership.

Wen addressed a World Economic Forum in Dalian, northeast China on Thursday where he admitted that his administration hadn’t done enough to narrow inequality and root out corruption in the public sector. Specifically, the premier urged a stricter adherence to the rule of law.

The most important mission of a ruling party is to abide by and act in strict accordance with the Constitution and the laws. The party should not replace the government in governance and problems of absolute power and overconcentration of power should be redressed.

Although shrouded in the sort of cautious generalizations that are becoming of a leading Chinese government official, Wen’s implicit criticism of the Community Party was unusually blunt. The party abuses its power, he said, and stands in the way of a more efficient, more accountable government. It is a problem that is not to be underestimated as the ruling party’s legitimacy depends almost entirely on China’s enormous economic expansion — a process that can’t go on indefinitely.

Among the urban elite there is a growing political awareness. Entrepreneurs and professionals are increasingly critical of economic planning while the lack of political freedoms has inspired minor protests in the otherwise prosperous coastal regions.

Thousand of demonstrations in fact take place across China every year. The Chinese state spends as much on internal security as it does on external defense and fueling the unrest is not merely forced relocation, pollution or corruption; it’s a lack of transparency and accountability on the part of Communist Party bureaucrats which makes it frustratingly difficult for ordinary people to see that their grievances are addressed.

One way of improving accountability would be introducing democratic reforms from the local level up. Chinese people haven’t had any real voting power beyond the village level for decades. Wen on Thursday promised that eventually, they would. “People’s democratic rights and interests prescribed in the Constitution must be protected,” he said.

The most important ones are the right to vote and to stay informed about, participate in and oversee government affairs.

As the Chinese become richer, educated and more worldly, they will be tempted to take matters into their own hands. Prosperity isn’t enough for the middle class masses in the east — even as it hasn’t reached hundreds of millions of people more in the western hinterland yet.

Wen has long advocated a broader growth strategy that includes the country’s largely agrarian and still destitute countryside as well as an extension of China’s social safety net for the poverty stricken everywhere.

In order to diversify the Chinese economy and finance increased welfare spending, the state will likely have to cut subsidies and subsidized loans to companies, real estate developers and other vested interests that have allies in the party. In other words, it will have to root out the very corruption that Wen spoke about.

With major changes in political leadership expected next year, it may prove difficult for the ruling generation to implement such reforms however. Hu Jintao is due to step down as party secretary next year. Wen will make way for a successor in 2013.

China Aims to Enhance Internal Demand

During the annual National People’s Congress in Beijing this weekend, China’s ruling Communist Party outlined its twelfth five year economic plan which seeks to enhance internal demand and mend social imbalances. Premier Wen Jiabao told the some 3,000 delegates from across the country that China must fight corruption and temper inflation to ensure domestic tranquility.

China’s inflation rate reached almost 5 percent last year and continued to accelerate despite recent interest rate hikes. Rising food and fuel prices are a concern because poor families spend up to half their incomes on basic commodities. Read more “China Aims to Enhance Internal Demand”

Wen Extends Support to Embattled Pakistan

Premier Wen Jiabao of China praised Pakistan’s efforts at combating terrorism on Sunday and promised to further advance the two countries’ strategic partnership in a speech before parliament. Over the weekend China and Pakistan signed some $15 billion worth of trade deals which is just half of the total value of the agreements signed during the premier’s three day trip to the country.

Bilateral trade between China and Pakistan has grown rapidly in recent years. At a business summit in Islamabad this Saturday, Wen pointed out that in 2002, trade between the two countries amounted to just $1 billion. After the signing of a free-trade agreement in 2006, last year, that number had risen to nearly $7 billion.

China has long been a friend of Pakistan’s, an alliance that is largely inspired by shared animosity with India. Pakistan’s president visits Beijing regularly, several times a year indeed and although the Chinese preferred to work with his predecessor, the more authoritarian General Pervez Musharraf, they gladly continue commerce and an exchange of arms technology up to this very day. China is one of Pakistan’s largest weapons suppliers and currently building two nuclear reactors in the country.

As the Chinese are also set on expanding their economic ties with South Asia, Sino-Indian rivalry is heating up. New Delhi frets being surrounded by a Chinese string of pearls ranging from Hong Kong to Port Sudan with naval stations in Sri Lanka and Pakistan in between.

During his visit to India last week the premier tried to convey the message that there is enough space in the world for China and India to develop together, even cooperate. But India’s political allegiance with the United States is a complicating factor.

When he came to India last month, President Barack Obama called for closer business ties with India and affirmed American support for the country’s bid to permanent United Nations Security Council membership. From the American perspective, securing a stable working relationship with India is pivotal. With some 1.2 billion people and an economy that is booming, both in manufacturing and services, India acts as a natural check on China’s ambitions. It is difficult to imagine a centralized, semi-democratic government taking shape in Kabul without India’s support or at least consent moreover.

At the same time, the war in Afghanistan has spilled over into the mountainous tribal areas of western Pakistan and America needs Pakistani support to fight terrorism in the area. The administration’s most recent assessment of the war specifically pointed at sanctuaries in Pakistan as detrimental to the American counterinsurgency effort. Should American aid for Pakistan disappear, it will have even less reason to destroy these safe havens and be tempted to turn to China or Saudi Arabia or both for support.

The Saudis rather prefer an Islamist regime over an Afghan government allied too closely with the West while the Chinese will jump on any opportunity to strengthen Pakistan as a counterweight to India’s rapid ascension. New Delhi may be able to persuade the Saudis otherwise as its own bilateral relation with Riyad is improving but China’s interference can only amplify an already fragile nuclear balance as Pakistan’s ties with Muslim fundamentalists will pose a constant threat to India’s security.

The United States have tried to convince the Chinese that they should exert greater pressure on Islamabad to crush the Taliban insurgency along its Afghan frontier but it is difficult for President Obama to make that case while his administration appears to side with India unequivocally.

The president’s latest Asia trip may have only confirmed suspicion about America’s true allegiances among the Chinese and Pakistanis. Neither were on Obama’s itinerary while a joint statement of the president’s and Prime Minister Manmohan Singh’s recognized India’s role in East Asia.

The three great powers involved share similar interests however. China is India’s largest trade partner and despite geopolitical competition, they are united in opposition to Western tariffs, nuclear proliferation and Islamic extremism. Wen would not recognize that specifically while in Pakistan hough. “The fight against terrorism should not be linked with any religion or ethnic group,” he said as lawmakers burst into applause. Yet China is coping with a separatist threat of its own which is increasingly looking at Islam for ideology.

India is Complex Partner for Chinese Premier

China’s intentions for India are twofold. On the one hand it wants to improve trade relations but on the other, it wishes to have India boxed in in South Asia while continuing to fund its ally in Pakistan. Premier Wen Jiabao’s visit to India this week was a reminder of these dual objectives.

Wen’s India trip may have been more appropriate labeled the visit of China’s chief executive officer to New Delhi rather than its premier’s. In his tail some four hundred businessman crossed the Himalayas, the largest Chinese trade delegation ever to visit India.

Economically, both Asian giants are poised to dominate world affairs for the decades ahead. Each managed to weather the global recession with continued growth rates while bilateral trade is approaching $60 billion annually. Indian exports amounted to $17 billion up to October of this year while China exported more than $30 billion worth of goods to India during the same period.

Wen Jiabao understands that the world has changed since his last visit to India in 2005. China perceives America as a superpower in decline and it recognizes the need for greater cooperation with India, at least in Asia. At the same time the Sino-American relationship remains pivotal.

In the last two years there was occasionally talk of a G2 in which China and the United States would share world power. That has changed as the United States are unwilling to vacate their primary position and China is becoming more assertive, prompting the Americans to try to “check” its ambitions. Both are courting India in order to improve their clout in this threesome.

The border disputes between China and India are largely a thing of the past. It is understood that both are prepared to accept the present status quo in the Arunachal Pradesh region and in Jammu Kashmir’s Ladakh. The Chinese know that if they push India in this regard, it might not hesitate to decisively side with the United States.

This was evident from the words of China’s assistant foreign minister this week. China and India are both “emerging economies and major developing countries,” he pointed out. “Their relationship is one of the most important bilateral relationships of the two countries. Leaders of both the countries have agreed that there is enough space in the world for China and India to develop together and enough areas for them to cooperate with each other.”

Even if these words were draped in diplomatic niceties it is clear that China nor India is interested in reviving decade-old border disputes. Both are looking to the rest of the world instead for markets.

As far as India is concerned, its best days are ahead in this century. The world order of the near future looks to be one of Sino-American rivalry with India caught in between. Economically, strong ties with China are vital but politically, it is more inclined to side with the United States. In either event, it’s not ready to antagonize either.

India’s policy toward China was in a way articulated by its Foreign Secretary Nirumapa Rao in her speech to a think tank on December 3. “The view that India and China are rivals to me is an overgeneralization,” she said, “as well as oversimplification of a complex relationship which encompasses so many diverse issues.”

What worries the Indian leadership about China is its encirclement policy. China has actively courted Nepal, Bangladesh, Sri Lanka, the Maldives and Pakistan, apparently trying to surround India with pro-China regimes. India has responded with a similar diplomacy, improving relations with both its neighbors and countries in East Asia, including Taiwan, South Korea and Vietnam — which feeds existing Chinese anxieties about being “boxed in” from the Pacific by an array of American-allied nations.

Diplomatically, Wen has played a good guest in India so far and his hosts have naturally reciprocated. His visit seems more of a courtesy call from across the Himalayas however before the unfolding of a new era in international relations that will inevitably pit China and India against one another occasionally.

Wen Defends China’s Currency Policy

In Brussels today, Chinese Premier Wen Jiabao urged Europe not to “join the choir” clamoring for a rapid appreciation of his country’s currency. Deviating from his prepared remarks at a business conference, the premier warned that if the renminbi isn’t stable, “it will bring disaster to China and the world. If we increase the yuan by 20, 40 percent as some people are calling for,” he added, “many of our factories will shut down and society will be in turmoil.”

China has capped the appreciation of its currency at 2 percent since it relaxed its peg to the American dollar in June. Western countries continue to allege that China is artificially undervaluing the renminbi to make Chinese exports cheaper — which might undermine recovery in the United States and Western Europe.

In the United States, Congress has already approved retaliatory measures in the form of trade sanctions on China. The Bank of Japan is trying to drive down the value of yen by unexpectedly easing monetary policy. Brazilian Finance Minister Guido Mantega has expressed concern over an international “currency war” erupting.

Last week, the Chinese premier defended his country’s monetary policy in an interview with CNN, noting that not only has the renminbi appreciated more than 50 percent against the dollar since 1994; China still maintains a trade deficit with neighboring Korea and Japan and a deficit in services globally. “China does not pursue a trade surplus,” he said.

His fear of a yuan appreciation driving Chinese workers back to the countryside stems from Wen’s long-held belief that economic growth should be broader and more balanced between China’s industrialized coastal areas and its largely agrarian hinterland. He told CNN that China’s economic development “still lacks balance, coordination and sustainability.” A sudden shift in currency policy would only add instability to China’s business and investment climate.

Wen is in Brussels after attending a summit of Asian and European leaders that has failed to yield any meaningful results besides the signing of a free-trade agreement between the EU and South Korea.

Although Europe has formally sided with the Americans on the currency issue, former Luxembourg finance minister and current prime minister Jean-Claude Juncker formulated a more nuanced position on Tuesday, noting that an “orderly, significant and broad based appreciation of the renminbi would promote more balanced growth.” He did add that the yuan remains “undervalued.”

The euro hit an eight month record high on Tuesday, having risen 16 percent against the dollar and 14 percent against the yuan in the past four months alone. The high exchange rate is making it harder for eurozone exporters to compete. According to Commissioner Olli Rehn for Economic and Financial Affairs, the euro cannot continue to bear “a disproportionate burden in the adjustment of global exchange rates.” The recovery of the eurozone economy may be “weakened” he believes, unless others share in the burden.

The “currency war” is likely to resurface on the agenda during the upcoming G20 summit in Seoul next month.

France will take over the G20 presidency from South Korea next year when it simultaneously chairs the G8. French president Nicolas Sarkozy has championed global financial reform since the crisis hit two years ago and is expected to push for a multilateral accord on currency stabilization. Whether the Chinese are inclined to play ball may become evident when President Hu Jintao visits Paris in November.