China’s international impact makes its performance vital for both the domestic and global economies. The Xi Jinping-Li Keqiang leadership faces crucial questions that go to the core of the ruling system. The economy needs to stabilize but the slowdown now under way poses the risk of too sharp a decline in a country that has experienced largely uninterrupted strong expansion for the last three decades.
The Communist Party and the state government have committed themselves to economic reform, but since political change is not on the agenda, the main question is how monopolistic political Communist Party control can be maintained, given the inevitable liberalization that change will bring. In addition, the regime has depended on economic growth as a source of legitimacy since the 1980s and reform would mean slower growth in the short term. Apart from the economy, China faces the multiple challenges of corruption, the environmental crisis (air, water and soil), food safety, a weak legal system, regional unrest in Tibet and Xinjiang, Taiwan’s autonomy and the pro-democracy movement in Hong Kong.
The model of cheap labour and capital supplying strong export markets has run its course. Although we do not expect a hard landing, growth will likely continue to fall. China wants to move up the value chain, but it still has to guarantee employment and defend existing industries. We believe that despite official recognition of both the need for reform and the potential for improvement at state companies as well as in the private sector, liberalization will be slow to take effect as Xi Jinping focuses on "Party strengthening" and building up his own position as well as that of the country. Moreover, we expect the relaxation of currency controls will be limited.
Our unique approach ties together political and policy developments with the macro-economy and individual sectors such as infrastructure, property, consumer industries, agriculture and trade.
Our local presence, in-depth knowledge, analytical skills and sources enable us to track often opaque political and policy developments to provide a holistic picture of how China is developing. This goes well beyond the frequently confused (and confusing) monthly data and instant analysis of numbers. A key element is our analytical knowledge of how policy is framed and the factors affecting key issues such as inflation, the fiscal balance, currency and monetary policy, and social stability.
Only by melding the economic numbers with social pressures and the political objectives of the leadership can one paint a true picture of China's evolution in both the domestic and the global context.