China: Hard Landing and Turbulent Political Transition?

By. Dr. Harald Malmgren

China’s exports of high labor content, low value added manufactures are no longer internationally competitive.

A shift in export orientation to lower labor content, higher value added manufactured exports will take time measured in years.  A shift in export priority to infrastructure projects in the Third World (especially Sub-Saharan Africa and various regions of Asia) is under way.

China’s trade account may not be the powerful engine it was in the past, and trade deficits may be experienced.

The Chinese government will need to boost domestic consumption, but this entails higher wages among a wider swathe of the working population, which also threatens inflationary pressure.

What will be the impact of a hard landing and political transition in China. Credit Photo: Bigstock A road junction at evening in changsha, China

Chinese authorities are also faced with a banking system full to the brim with nonperforming loans, exhausted by government demands to lend to whoever came through the door asking for loans during the collapse of China’s exports in late 2008 and throughout 2009.

The government has lowered its target rate of growth to 7.5%, confirming its expectation that the era of double-digit growth is over.

Even achieving the new, lowered target is doubtful.  China’s “investor class” expects a much lower outcome.  The true number may never be known, as Chinese GDP figures are always subject to manipulation with artificially contrived adjustments designed to assure the world of continuing “success.”

Investors in the outside world have assumed that the 2012-13 change in China’s leaders will be smooth, but among China’s growing “investor class” there has been growing worry since late last year that the transition will not be smooth, and may experience aggressive rivalries and hot competition for political and economic power.

The change in leadership for China’s President and for China’s Premier are already set, but competition for the 7 other seats in the Standing Committee of the Politburo has just begun.  The Standing Committee is the real decision maker for the whole of China, including its policies for national security, the economy, and social order.  Government ministries, the Chinese central bank, and other agencies are subordinate to this group of 9.

As older leaders retire or are replaced, there will be new membership of the 25 seat Politburo, and then changes in many Communist Party management posts, regional governors, mayors and deputy mayors in major cities, and so on.

Some Chinese believe the changes in the national power structure may reach 3,000 individuals and in Chinese ways of thinking, each of the incoming families of such individuals will rise, while some of the families of outgoing officials will fall.

A number of key questions emerge from the possibility of a “hard landing.”

  1. If China’s economic transition results in a “hard landing” for a few years, will transitional competition for power weaken timely and effective government responses?
  2. Can a new power structure be effective from day one, or will it have to experience a lengthy learning experience, leaving the economy subject to economic turbulence?
  3. Is it realistic to assume that power struggles will come to an end when the formal reconfiguration of political appointments is complete?
  4. Will the consequences of global slowdown and fading world trade momentum be manageable?

As for the rest of the world:  Will new leadership need foreign “distractions” to keep domestic criticisms and social unrest subdued?

It seems quite possible that limited conflicts with neighboring countries may become part of the toolbox of maintaining domestic political cohesion.

"If everyone is thinking alike, someone isn’t thinking."

—General George Patton Jr.

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