China On The Horns of A Dilemma

September 30, 2008

China On The Horns of A Dilemma(By Martin McCauley.) The party is about to end for the Communist Party of China (CPC).

The climax came with the Olympic Games, followed by the Chinese astronauts blasting into space and returning triumphantly back. National Day celebrations begin on October 1 and would last a week. Then it’s back to reality.

The Central Committee (CC) of the CPC convenes immediately after the festivities are over. It promises to be a volatile session. Ostensibly it is about agriculture but the effects of the world credit crunch and growing unemployment are bound to be broached. CC members – the second tier of Party power after the Politburo – are under tremendous pressure in their bailiwicks to bring back promises of money and credits from Beijing. The Chinese property market has taken an unprecedented hit and thousands of small factories have shut their doors as export orders have dried up. Even some medium-sized enterprises have had to close down. In a country where little unemployment or social benefit is available, hardship is clearly evident.

The spectre for the CPC is that members of the middle class, who have fallen on hard times, may unite with struggling peasants and unemployed workers. Social unrest – riots and disturbances – would then become a real possibility. Economic growth this year is expected to slow down to 9 per cent, a figure which the rest of the world would be delighted with. However, the mood in China has changed and pessimism is in the air. The Shanghai Stock exchange fell to under 2,000. Other stock exchanges also suffered sharp falls. There are an estimated 130 million Chinese who buy stocks and shares. Almost all of them have lost money. Indeed, some of them have been wiped out financially. An army of 130 million angry punters is enough to strike fear into any politician’s heart.

The CC cadres have been dubbed the new ‘warlords’ of modern China. Beijing has its work cut out to contain their ambitions and demands. They want preferential treatment and subventions for their provinces and cities. If they do not get them, the hard pressed citizens may protest and force the ‘warlords’ out.

Property values along the eastern ‘Gold Coast’ have dipped by at least 20 per cent this year. Riots broke out in early September in the beautiful city of Hanzhou, capital of the rich coastal Zhejiang province. A developer had been offering discounts of up to 25 per cent to new buyers. Hundreds of those, who had earlier this year bought apartments, then went ballistic when they applied for the discounts and were turned down. About 100 owners protested outside the company’s offices and smashed windows and furniture. The police had to be called to restore order.

The police have been instructed to be on the alert for stocks and shares punters out to make trouble. Stock brokers’ offices have been vandalised but there is no evidence yet of a national protest movement. Dozens of small and medium sized estate agents have shut their doors or filed for bankruptcy.

Property companies that have raised capital from private sources and, as such, are completely unregulated pose a particular problem. Their sales pitch has been that investors will receive a return far above that was offered by other financial institutions. A case in point was in Hunan province where several thousand investors in a property company staged a riot after hearing that the company was about to fold. It had promised thousands of locals over 70 per cent interest on their capital. Apparently they had poured over 7 billion yuan ($1 billion) into the company. People’s Armed Police and anti-riot squads had to be sent to the town after angry investors had blocked railway lines and surrounded government offices.

Intense pressure has resulted in the People’s Bank of China (PBC) – the Central Bank – lowering the interest rate and the reserve requirements for banks. The city of Xian – famous for the Terracota Warriors – has been authorised to provide a special bonus to first time buyers in an attempt to jump start the property market there. Other cities would want to follow suit.

The PBC managed to bring the rate of inflation down to 4.9 per cent in August – it was 8.7 per cent in February – but any rash expansion of the money supply risks pushing inflation back up again.
Another highly contentious issue is Beijing’s desire to reduce substantially the number of towns and townships in China. This is Prime Minister’s pet project which he has launched in 2003. The number of towns had declined by about 5 per cent and townships by 8 per cent by the end of 2004. Then the process got bogged down. To reignite interest in the proposal, county governments responsible for towns and townships were promised a bonus of half a million yuan ($73,000) for each town or township they abolished. They would also be given 4,000 yuan ($584) for each local government post they abolished.

This was an extraordinary move as it indicated that Beijing’s edicts are being ignored at the local level. The centre has conceded that its authority is limited in the regions. As one newspaper pointed out, it is an open invitation to local governments to forward fraudulent claims about the number of posts abolished. A hundred could be sacked one day and Beijing would be informed of this. They could then be quietly reemployed in different positions.

In the battle with corruption the CPC has demanded that all CC cadres declare their assets and those of their relatives. This regulation is to take effect early next year. Predictably it has not gone down very well and 70 per cent of those polled reject the proposal. This is part of the clean-up of the Party and government machines and information about cadres’ wealth will be posted on websites.

It is now clear that the poisoning of babies drinking milk sold by Sanlu, a huge diary combine in Hebei province, began before the Olympics. It was suppressed because Beijing did not want ‘bad’ news spoiling the festive mood. The company was on good relations with the Party and government bosses of the province as it contributed generously to their coffers. The fallout may cost China dear and force a much stricter regulatory framework. However, the above analysis reveals that Beijing only has limited influence over the economy at the local level.

The upcoming CC plenum promises to be one of the most explosive of recent years. If the reader thinks that lobbying for credits and bailouts in Washington is fierce, Beijing may put the US capital in the shade soon.