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China’s ability to rebalance its economy. Economists now widely agree that

China needs to shift its economy away from investment and toward consump- tion and services to sustain long-term growth. China’s economic data for Sep- tember showed what may be the first signs of that rebalancing process. In the first three quarters, consumption contrib- uted more to GDP growth (55%) than investment did (50.5%). Tis is an encouraging sign, but it’s

far from mission accomplished. Infra- structure spending has surged in recent months as Beijing tried to cushion an eco- nomic slowdown. Investment in railways climbed 78% year-on-year in September. If this trend continues, investment could easily outweigh consumption as the main driver of the economy for the full year. Rebalancing necessitates not just tip-

princelings). Tese groups may derive their power from different sources, but that’s no guarantee of their ideology. Tough they are both princelings,

for example, Xi Jinping wanted noth- ing to do with Bo Xilai’s ultra-left-wing policies. Despite their different factional backgrounds, potential Politburo Stand- ing Committee members Wang Qishan and Wang Yang are both known for their support of economic liberalization.

Phalanx formation

Te lack of transparency at the top makes it difficult to predict China’s future. But the fact that Xi and the party are so wary of exposing any fault lines is in itself an important lesson, with implications for

technology vulnerable to hacking. Huawei also seems ill-positioned to turn down the Chinese government, which maintains tight control of the domestic economy, if it seeks to use the company’s devices for espionage. The US already broadly suspects China of cyber espionage, including unproven alle- gations in the hacking of the US-China Economic Security Review Commission last year. But these concerns should not nec-

essarily extend to other deals. One such example is China National Offshore Oil Corporation’s US$15.1 billion takeover bid for Canada’s Nexen, which drills for oil and gas in US-controlled portions of the Gulf of Mexico. US politicians are similarly painting this deal as a threat to US national security.

ping the balance of growth but reforming the country’s economic structure. Chief among these reforms is changing the way capital is distributed. Te Chinese bank- ing system is set up to channel funds from the general populace to well-connected state-owned companies, which mostly invest the money in fixed assets of dubi- ous social value. Rebalancing will require Beijing to stem this flow of cheap capi- tal to SOEs and allow China’s consum- ers and small businesses to play a greater economic role. Tese changes will clearly compro-

mise the interests of powerful state- owned companies and banks. Te reforms needed to rebalance the economy – as advised in the “China 2030” study by the World Bank and the National Develop-

But unlike Huawei’s US expansion,

CNOOC’s control of Nexen would only be of strategic importance in the unlikely event of an open conflict between the US and China, when the two countries could move to block each other’s resources. If this occurred, US military strength would mean far more than CNOOC’s signature on a contract. Congressional criticism of the pending

Nexen takeover harkens back to CNOOC’s bid for US energy company Unocal in 2005. At that time politicians successfully fought to kill the deal on mostly symbolic fears of China taking over such a large US company. Although legislators cited security con- cerns, those appeared to be just one more rhetorical tool to stop the takeover. But much has changed since the Unocal

The reforms needed to rebalance the economy could displace 5 million SOE workers and an equal number of government agencies

ment and Reform Commission – could displace 5 million SOE workers and an equal number of government agencies, according to Minxin Pei, the director of the Keck Center of International and Strategic Studies Education at Clare- mont McKenna College. As the new helmsman, Xi will likely

lack the political capital for some time to oppose these powerful entrenched inter- ests and push through such dramatic reforms. Reforms to rebalance the econ- omy are thus likely to proceed only incre- mentally, prolonging concerns over the sustainability of China’s growth model. More information on the Chinese

political process is available than ever before, both within China and abroad. But foreign audiences still seem to know little about the most significant political division in China. It is not between the princelings and the Communist Youth League, but between Beijing and the dif- fuse parts of the economy it must rally to accomplish its goals. Te focus now should be not on Xi’s

personal predilections but on the more than 70,000 local officials he will have to muster to his cause.

days. Most importantly, the US is in a far weaker economic position. It cannot afford to turn away companies from the world’s second-largest economy – which invested more than US$1.3 billion in the US in 2010 alone – unless they truly pres- ent a threat to national security. US voters consistently say that their

top concern is the economy. When it comes to vetting Chinese investment in the US, politicians would do well to remember that. Regulators, including those with CFIUS, need to distinguish the companies that present legitimate security threats from those that don’t. Otherwise, Chinese companies will vote with their wallets and take their business elsewhere.

China Economic Review • November 2012 7

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