China swaps exuberance for the hard yards

Despite a robust growth forecast, the Communist Party's campaign against graft and official extravagance and reforms of its urban labour registration system will provide challenges in China.

A year into the new leadership’s campaign against corruption and official extravagance and the year is ending with little exuberance – even while economic growth remains strong.  

In 2013, sales of luxury goods in mainland China, which accounts for 29 per cent of the global market, rose only 2 per cent over the previous year, compared with 7 per cent last year. This was the slowest growth in the world’s biggest luxury goods market for much of the past decade.

The media is full of stories of officials being outed for everything from excessive alcohol binges on the public purse to graft and corruption. In Hunan province, 1,673 officials have been investigated so far. It has also been reported in official media that ‘leading officials’ in 22 provinces have returned illicitly obtained vehicles, offices and apartments. The Ministry of Agriculture has just issued instructions for the Chinese New Year which starts on January 31 forbidding them to send or receive gifts, including fruit and vegetables. It was also announced over the weekend that a leading taxation official in Guandong province is being investigated for ‘serious violation of discipline’ (read: corruption).

A chill is spreading among officials. Increasingly they are declining invitations to lunch or dinner, even when there is a clear business agenda. Officials are required to report in advance the purpose and reason for accepting hospitality and then to report on the discussions afterwards. Many say that accepting such invitations require too much effort and exposes them to potentially unwelcome attention. At last weekend’s Sanya Forum, held at Hainan Island, a number of senior ministerial-level officials, including city mayors, pulled out at the last minute.

Despite the uncertainty and caution caused by these campaigns, the economy has sustained robust growth throughout the year. Annual growth is likely to be at the high-end of the seven per cent range. The most recent HSBC flash PMI index show industrial production was continuing to expand. The PMI was 50.5. Anything above 50 indicates expansion.

The annual Central Economic Work Conference was held over four days last week. Usually these take up only two days, but the longer meeting was in response to the big number of issues to be addressed following last month’s Third Plenum. The Work Conference set about adding detail and substance to the policy pronouncements of the Plenum’s Decision.

In familiar terms, the Conference said the government would seek to maintain stable economic growth through “proactive fiscal policy” and “prudent monetary policy”. Although a target growth figure was not released, it can be expected that the official growth target will again be in the order of seven per cent. This is the annual target growth rate in the current five-year plan.

Themes to emerge in official public reporting from the Work Conference included measures to contain the growth of local government debt, which was described as a “crucial task” for next year. Other themes were food supply and food safety and standards, employment of graduates, and reducing over-capacity in six industries, including iron and steel, aluminum and shipbuilding.

Emphasis was also given to promoting international trade, including by completing more free trade agreements and establishing more free-trade zones with preferential financial policies.

A separate conference on urbanisation presided over by President Xi Jinping was also held late last week. Xi’s presence underlined the importance being placed by the leadership on continuing rapid urbanisation, which will likely be a major theme in economic policy next year. Six major targets were set, which seek to accelerate the pace of urbanization in small to medium sized cities while balancing financing and environmental needs.

As in the Third Plenum’s Decision, reform of the hukou system – urban labour registration – was again declared a major objective but no details were provided as to how this was to be achieved. Separately, the Ministry of Public Security and 11 other ministries and commissions are reported to have drafted guidelines for hukou reform which, if adopted by the State Council (China’s cabinet), would come into effect immediately and lead to a new system across the country by 2020.

Apart from the myriad of agencies that are involved, the big challenge for hukou reform is the money: how to fund social welfare, health and education benefits of the estimated 260 million who are currently unregistered migrants in China’s cities.

Predictably, both the Work and Urbanisation Conferences re-emphasised the themes of the Third Plenum, notably pushing on with the further reform and opening of the economy and calling for greater reliance on market forces. While much detail is still lacking, through these high-level policy meetings flesh is beginning to be put on the bones of the Plenum decision. All of this is leading up to next year’s National People’s Congress expected to open at its usual time in early March.

While the growth outlook remains positive, despite the challenges of rising debt at the local level and in the shadow banking system, and as the government continues its seemingly endless struggle to cut excess capacity in heavy industry and control rising property prices, the campaigns to clean up the Party and root out corruption are making the Party and bureaucratic elite ever more nervous.

Despite continued reports in foreign and Hong Kong media that look more like clumsy deliberate leaks, there has been no official statement on the fate of former Standing Committee member and former head of China’s internal security, Zhou Yong Kang. At least half a dozen close associates of Zhou, including former Deputy Governor of Sichuan province, and senior executives of PetroChina, Zhou’s former power base, and his son have been detained on corruption charges. It has now been announced that another close associate, the Chairman of Kun Lun Energy Co, has been detained on corruption charges.

The net around Zhou is drawing ever tighter. To arrest a former Standing Committee member would hark back to the days of Mao. While people welcome the crackdown on corruption, settling political scores at this elite level in these ways is potentially destablising. As some are fond of saying, they have the body already (Zhou’s), so why bother cutting it up?

So next year is unlikely to see a return to the heady effervescence and exuberance of the past decade, even as China will continue to be one of the fastest growing economies in the world. A joyless new year is in prospect.

Geoff Raby is chairman and CEO of Beijing-based advisory firm Geoff Raby & Associates, and a former Australian Ambassador to China. He is vice chairman of Macquarie Group China and a Vice Chancellor's Professorial Fellow at Monash University.