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ORF CHINA WEEKLY
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Vol. II Issue. 47
Economic reforms in China: From Hu to Xi
Arvind John
19 November 2012

ANALYSIS

As China's once-in-a-decade leadership change was completed with the 18th National Congress of the Communist Party of China last week, the world will eagerly look on to see what this transition will mean in terms of a policy shift. But even before we witness what the new leadership has to offer, China's President Hu Jintao voiced out the need for economic reforms in the week that culminated in Vice-President Xi Jinping taking over the leadership of the CPC.

Hu Jintao opened the congress, at a time when China's economy has hit a three year low, with a call for reforms. Speaking at the Congress, Hu said, "We should step up efforts to transform to a new growth model and work hard to improve the quality and efficiency of the economy [?] We will continue to deepen our economic system reform and stick to the policy of expanding domestic demand."

"We should develop a multi-level capital market, take steady steps to make interest rates and the renminbi exchange rate more market-based and promote the renminbi's convertibility under the capital account in due course," he said.

While the speech in itself did not spew any fresh ideas, the timing of the reiteration of these ideals is significant given the backdrop of the economic slowdown and leadership change.

President Hu Jintao, speaking at the Congress, has given indications to the effect that the new leadership of the CPC will continue with the proposed reform plans. While the probability of witnessing any move towards political reforms in China is very low, there is a likelihood of the continuation of an incremental trend towards market liberalisation and financial easing.

The last couple of years have already seen a few financial reforms being carried out by the Chinese government in light of the severe slowdown in economic growth and the consequent loss in investor confidence. Recognising the need for structural changes in its economy, the leadership, in March 2011, adopted a new development strategy of increased household consumption, reducing reliance on exports, expanding services, and moving to more innovative, less resource-intensive manufacturing.

Last June, China's Central Bank allowed the country's lenders a certain degree of flexibility, within a stipulated range, to fix the interest rates that they offer to consumers. The Centre has also widened the range in which the yuan can be traded against the dollar, from the previous 0.5 percent to 1 percent. China's Central Bank also reduced the Reserve Requirement Ratio (RRR) that the country's banks are supposed to have a few times over.

The China Securities Regulatory Commission has also relaxed the entry rules for foreign investors under the Qualified Foreign Institutional Investor (QFII) programme in a bid to attract more overseas investment.

President Hu in his address at the National Congress also spoke about the need for a more inclusive growth model for China. The rising gap between the rich and the poor has become a matter of serious concern. If there are rich and developed provinces like Shanghai and Beijing on one hand than we have provinces like Guizhou which are compared to the poorest countries of the world like Sudan.

Another significant reform measure that has been widely debated is the need to break the monopoly of the "gargantuan state-owned enterprises".

Earlier this year, Premier Wen Jiabao said in a speech, "We must move ahead with reform of the railway, power and other industries [?] complete and implement policies and measures aimed at promoting the development of the non-state economy, break monopolies and lower industry thresholds for new entrants."

State-owned enterprises (SOE) have become a "monster of the party's own creation". Today, SOEs and their affiliates account for more than half of China's economic output and employment. Out of the 70 companies mentioned in the 2012 Fortune Global 500 list, which are situated in mainland China, 65 are state-owned.

Despite the success of the state-owned enterprises in invigorating the Chinese economy, given the recent economic slowdown that China is witnessing, the dominant nature of SOEs, economists fear, will stifle innovation and restrict the growth of private companies, drastically affecting the growth in employment.

Authorities are not proposing an overhaul in the structure of state-owned enterprises; plans are to split the SOEs to bring greater private investment in sectors dominated by the state, which includes banking, energy, rail and telecommunications. Plans for changes in the working of state-owned enterprises have been met with a lot resistance given the high degree of power and influence garnered by individuals associated with it. State-owned enterprises dominate strategic industries, enjoying near unlimited access to finances courtesy of state-owned banks, coupled with very strong political connections.

Financial reforms and fighting corruption have become key buzz words in China today. The leadership has become aware of the need for opening up the economy and creating a greater element of transparency in economic functioning of the state. Corruption of the big state-backed players was recognised as a matter of concern by the previous leadership. This trend is likely to be picked up by the new leadership as well.

From the composition of the new party politburo, and the inherent nature of the Communist Party of China, most analysts do not foresee any inclination towards "democratisation"; however, the pressures and demands of the state of international economy, in general, and the Chinese economy, in particular, will mean that the trending changes to China's economy that have been made so far will most likely continue.

FOREIGN AFFAIRS
China, ASEAN strengthen cooperation at East Asia Summit

Chinese Premier Wen Jiabao arrived in Cambodia on November 18, 2012 to attend a series of meetings for East Asian leaders, including the 15th China-ASEAN Summit and the 7th East Asia Summit.

Mr. Wen took the opportunity to hold bilateral meetings with leaders of Malaysia, Indonesia and Cambodia, pledging to strengthen cooperation with these nations, stressing on unity cooperation and development.

The attendance of the Chinese Premier has important implications for the development of China-ASEAN relations and East Asian regional cooperation, which has gained grater significance since the region has been struggling to emerge from the global economic downturn.

Sources also report that China will propose some new initiatives in various sectors, including announcing its partnership in negotiations concerning the Regional Comprehensive Economic Partnership (RCEP). The RCEP is expected to incorporate huge economic power of 16 Asia-Pacific nations including China, Japan, South Korea, Australia, New Zealand, India and the ASEAN nations.
Source (s): CCTV, November 17, 2012 and Xinhua, November 18, 2012.

China urges UNSC to look closer into Africa

China urged the United Nations Security Council (UNSC) to pay more attention to the demands of Africa and support the efforts of the African Union in maintaining peace and security in the continent at a plenary meeting of the 67th General Assembly on the reviewing the annual report of the Security Council.

China's UN representative sated that the Security Council should make better use of such means as mediation and coordination to prevent conflict and turmoil, reform and improve the UN peacekeeping mechanisms, support post-conflict peace building in order to make a greater contribution to safeguarding international peace and security.
Source (s): CCTV, November 16, 2012.

World leaders, parties congratulate Xi Jinping

Leaders of countries and political parties across the globe sent congratulatory messages to Xi Jinping on his election to the post of general secretary of the Communist Party of China Central Committee.

US President Barack Obama, Russian Prime Minister Dmitry Medvedev and AU rotating President and Benin's President Thomas Boni Yayi were amongst the many major international personalities to extend their support to Mr. Xi.
Source (s): Xinhua, November 15, 2012.

Clinton reaffirms US neutrality in the South and East China Seas

In an official AUSMIN 2012 Joint Communiqué, the US and Australia said that both nations sought a peaceful resolution to South and East China sea disputes while also welcoming a 'strong, prosperous and peaceful China playing a constructive role in promoting regional security and prosperity'.

The US Secretary of State Hillary Clinton joined Australian Foreign Minister Bob Carr in reaffirming US and Australian neutrality on territorial disputes across the South and East China seas, adding that increased cooperation with China is mutually beneficial to all stakeholders in the Asia-Pacific. The AUSMIN is an annual forum for bilateral consultations between Australia and the US.
Source (s): Xinhua, November 14, 2012.

POLITICS AND SOCIETY
A new generation of leaders unveiled

A new generation of leaders took to the stage on Thursday with Communist Party of China chief Xi Jinping acknowledging the challenges ahead, including improving people's livelihoods and tackling corruption, and confidently pledging to overcome them.

Xi was sworn in on Thursday as general secretary of the Central Committee of the CPC, leading the seven-member Standing Committee of the Political Bureau. He also took over as chairman of the CPC Central Military Commission from his predecessor Hu Jintao.

The other six members of the Standing Committee of the Political Bureau are Li Keqiang, Zhang Dejiang, Yu Zhengsheng, Liu Yunshan, Wang Qishan and Zhang Gaoli. They were elected at the first plenum of the 18th CPC Central Committee following the Party's 18th National Congress.

Wang was also elected secretary of the Central Commission for Discipline Inspection of the CPC.
Source (s) China Daily, November 16, 2012.

CPC congress documents to get digital publishing

Several key documents concerning the just-concluded 18th National Congress of the Communist Party of China (CPC) will be published in both traditional and digital format on November 19.

These documents include the report to the congress, the CPC Constitution and a compilation of assorted congress documents, according to a statement from the People's Publishing House.

It will be the first time any CPC congress documents have been published as e-books.

The digital versions of these documents will be priced at half of those for their paperback counterparts and will be released through a variety of online publication platforms including 360buy.com and dangdang.com, two leading Chinese e-commerce websites.

According to the publishing house, the first-print publication volumes of these documents will be higher than those for the 17th congress, with 1.4 million and 2.15 million copies planned respectively for the congress report and the CPC Constitution.
Source (s) Xinhua, November 16, 2012.

ECONOMY

PRC, ROK pledge to speed up FTA negotiations

Speaking at the sidelines of the East Asia Summit, Chinese Premier Wen Jiabao and South Korean President Lee Myung-bak pledged to speed up the negotiations on a Free Trade Agreement (FTA) between the two countries. The beginning of the negotiations for an FTA agreement was announced in May.

Recognising the complicated global and regional situation, Wen acknowledged that close economic cooperation between the two countries will be significant in their economic growth and also the recovery of the global economy.

During the meeting with Lee, Wen said, "The two sides should accelerate bilateral FTA negotiations to reach consensus at an early date and make joint efforts to provide a fair, open and transparent environment for enterprises."

Trade between China and South Korea currently stands at $220.6 billion dollars, and Wen believes that it will reach the target $300 billion by 2015.
Source (s): China Daily, November 19, 2012.

PBOC Governor admits to "side-effects" to new policies

Zhou Xiaochuan, Governor of the People's Bank of China, while acknowledging the positive impact of the macro-economic policies adopted by China to offset the downturn in the economy, admitted that the economy is facing 'latent side effects'.

Speaking at the Financial Street Forum in Beijing, Zhou noted that the monetary policies and stimulus packages that were introduced have led to some overshooting and fluctuations in the economy.

"We hope it is a fluctuation that is narrowing down and thus the whole system can achieve stability as soon as possible," he said at the Forum.
Source (s): China Daily, November 19, 2012.

Boom in China's import value

China's Vice Minister of Commerce, Zhong Shan said that China's import scale has expanded 22 percent as an annual average in the last decade.

China's annual import value jumped from $295.3 billion to $1.7 trillion from 2002 to 2011. At present, China has 9.5 percent of the world's import shares as compared to the 4.4 percent in 2002.

While China might have been affected by a slower growth pace due to a conscious decision by the government and a drop in international commodity prices, Zhong told that there is still 'great' potential for growth as strengthening the import sector has became a long-term strategy of Chinese foreign trade.
Source (s): China Daily, November 17, 2012.

SCIENCE AND TECHNOLOGY
China launches another satellite for environment monitoring

China launched its third satellite which would join the "Environment I" satellite family ? a plan initiated in 2003 to create a constellation of environment monitoring satellites. The recent radar satellite will work with the two operating optical satellites and the constellation will provide data for assessing natural disasters, emergency aid and reconstruction. The constellation will also enable Beijing to monitor and forecast ecological changes, pollution and natural disasters. The satellite was sent into orbit using the Long March -2C rocket which also carried two additional satellites for in-orbit experiments for new equipment, methods and miniature satellite platforms.
Source (s): China Daily, November 19, 2012.

China to launch Congo's first satellite

China is will develop and launch the first satellite for the Democratic Republic of Congo by 2015. The communication satellite ? CongoSat 1 ? will be developed by the China Academy of Space Technology, according to the terms of the contract signed between the two countries. China will also construct ground based facilities including control centre and training facilities for the African nation, apart from giving training to the satellite operators. Source (s): China Daily, November 18, 2012.

Contributors:

Sadhavi Chauhan
Rahul Prakash
Arvind K. John
Shaantanu Shankar