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WORD TRAVELS: A Chinese man shops next to biographies of US President Barack Obama at a Hangzhou bookstore

it a currency manipulator, apply new

tariffs, execute a variety of unilateral actions to show the Chinese there’s a new sheriff in town, Xi Jinping will react very strongly. And he’ll do so for two reasons. One is the Chinese have experience with this before when the US has changed presidents, and their reaction always is that you have to show the new guy this is the wrong way to elicit cooperation from China. But secondly, Xi recognizes that he needs to build tremendous domes- tic political capital in order to carry out the reforms that are so necessary during his first five years in office. If in his early months he is seen as caving to the US, it will deeply damage his efforts to garner sufficient political capital to undertake the domestic reforms that are likely to be at the core of his agenda. But bot- tom line, I think the Chinese will want a much-improved relationship with the US. On the US side, if Obama is elected, I think he would be responsive and our policies would remain pretty much as they are now. With Romney, there’s more of an unknown quantity. He’s talk- ing extremely tough on China, but then again he has no responsibility now but to get elected. Once elected, when he knows he has to cope with the consequences of

32 China Economic Review • November 2012

The problems that Chinese success creates are more likely ones we know how to deal with

whatever he does, he may choose to reca- librate significantly. We’ll have to see.

We’re seeing increasing uncertainty in China now, with the economy slowing and the leadership transition approach- ing. Are there scenarios with China you lose sleep over? Sure there are. Let me be very candid. From a US interest point of view, we do better with Chinese success than we do with Chinese disappointment or failure. Having wrestled with these issues for many years, fundamentally I come down on that side. Te problems that Chi- nese success creates are more likely ones we know how to deal with. China now faces one of the most difficult challenges it’s had since the 1970s: the challenge of significantly restructuring its economy at a time when the political system is structured in a way not to allow that to happen. Te incentives for the top party

and government leaders in each locality from the provincial level down to the township level – even if this is only the top two people [in each location] we’re talking about, it’s more than 70,000 offi- cials – are very much built around the model that has produced all the growth of the last 30 years. Tat model has been the basis for rewarding and promoting these officials, so not surprisingly they are comfortable with that model and have learned how to milk it for satisfaction. Te economic development model of the 12th Five-Year Plan, which is a model that suits both Chinese and American interests very well, requires restructur- ing those incentives in a major way. It’s going to be extremely difficult for the top leadership in China to develop the politi- cal will power and capacity. You also now have enormous SOEs that are extremely powerful and that would be disadvan- taged by the 12th Five Year Plan, and many of them are linked to elite families. So while they formally adopted the 12th Five-Year Plan in March of 2011, I see very little evidence at this point that we’re going to have rigorous implementation of it. Without rigorous implementation of the 12th Five-Year Plan, China within 10 years is going to be in deep trouble.


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