China's prime minister, Wen Jiabao, knows a trick of Western politicians--stay on message.
His report to the newly opened National People's Congress told the Chinese several things they have heard before, many times. Growth needs to be sustainable. The growing gap between rich cities and poor countryside must be narrowed. Pollution must be cut and energy used more efficiently to improve the quality of life.
The policy prescriptions were equally familiar: cooling investment and lending, improving health, welfare and education in the countryside, addressing wage disparities between rich and poor, and reducing energy waste and pollution.
His problem has been that China's government has not proved too successful in implementing those policies. Growth has continued full-bore despite attempts to dampen it. The economy will probably grow by more than 10% again this year; the government wants 8%, the target it missed last year too, when the economy grew at 10.7%--its fastest rate for over a decade. (See: " China Keeps Promising Less Than It Delivers".)
Growing unrest in the countryside is testimony to the widening gap between city and rural incomes--and a particular concern on Beijing. Efforts to curtail the polluting aspects of China's growth have fallen short (see "Pollution and Prosperty"). Health and social security on which for three decades after 1949 Chinese could rely is in disarray.
In part, these are all growing pains of a country modernizing its financial system but which still lacks many of the tools of a modern market economy to manage it as state fiat weakens. In China, the provinces have sufficient autonomy anyway to make Beijing's central writ run weakly.
Beijing has been reining in credit and attempting to impose greater discipline on investment, particularly at state-owned enterprises and banks, long used to lending for political advantage more than profit. There is a straight line between bank lending and the real estate and stock market boons.
As part of its efforts to reorient the economy toward more domestic consumption and away from export-led growth, Wen also confirmed the imminent submission of a draft law unifying taxes to bring foreign firms up to domestic rates, which will come down to an anticipated 25%.
Companies with part foreign ownership and projects in nearly 60 specially designated economic zones, geared traditionally toward export production, now pay a corporate tax rate of 15%--less than half the 33% levied on local enterprises. The new rate represents a mid-rate between the old domestic and foreign ones.
Foreign investment only accounts for 5% of all capital spending in China, so the change in the tax regime is mostly symbolic of the efforts to stimulate imports and streamline exports. It is unlikely to make much of a dent, at least in the short term, in the politically contentious trade surplus, particularly with the U.S.
That, though, makes none the less urgent Beijing's need to manage rising protectionist sentiment in the U.S. and the European Union and concern over its growing coffer of foreign exchange reserves, particularly its dollar-denominated ones.
Where Beijing has to make substantive change in the short term is in ensuring that the wealth being generated by the country's rapid growth is more equitably distributed around the country, in line with President Hu Jintao's "socialist harmonious society"--a phrase that means that growth must not be achieved at the cost or politically risky social unrest.
But China also has to juggle economic management with the consolidation of Hu Jintao's control over the party as he reaches the halfway point in his presidency. Witness the anti-corruption campaign concentrated on Shanghai that has cleared out supporters of former leader Jiang Zemin and the massive reshuffling of local and central leaders, which will be continuing over the coming months, ahead of the 17th National Congress of the Chinese Communist Party later this year.
So for now, policy implementation has come to a halt. While foreign investors will be focusing on Wen's pronouncements on the economy and new property and tax laws, not much is likely to happen this year. The NPC, the country's top lawmaking body, is only the stage setter for the party congress.
But ahead of that Beijing has now raised expectations of improved conditions in the countryside--falling back on another old trick of Western politicians: more public spending on social programs. Stability in the countryside is the higher policy priority, especially ahead of the Beijing Olympics when China will be putting itself in a showcase for the world. FORBES
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