Bracing for the new China

China is strictly governed by a single party, but policies are decided in a ceremonious way in congresses on a magnificent scale. China’s annual political season kicks off in March with the country’s top advisory body, the Chinese People’s Political Consultative Conference, followed by China’s national legislature, the National People’s Congress, which are dubbed the “two sessions.”

Stock markets in the Western hemisphere enjoy what has been dubbed the January effect after governments unveil economic outlines and policies for the year. In the case of China, March has a similar effect. Beijing draws up its economic outline in December, but the agenda takes effect upon approval by the People’s Congress.

Every March, thousands of party representatives from all over China gather in Beijing for the annual session to review and rubber stamp a policy agenda. Passing all policies to run the world’s second-largest economy in just two weeks is not really the way it works. The two sessions merely serve as formalities and do nothing to detract from Beijing’s total power and control. The session members are sometimes referred to as a cheerleading squad.

Premier Li Keqiang delivered the government’s work report to the legislative session that opened on March 5 at the Great Hall of the People in Beijing. Li drew up the draft of the report and oversaw four rounds of reviews and moderations. It included a 13th Five-Year Plan, the road map to direct and run the Chinese economy up to 2020 from this year.

The infamously opaque Beijing government holds daily press conferences during the sessions. On the last day, the premier takes questions from the press. Li, a doctorate-holding economist from Peking University, gave fluent and detailed answers during the two-hour Q&A session without referring to any documents. Of the 16 journalists invited to the press conference, eight were from the foreign press. All of them asked questions in Chinese. No foreign journalist will dare to address a top Chinese official without mastering the host country’s language these days.

Beijing pledged it will achieve average annual economic growth of 6.5 percent for the next five years. Priorities were placed on restructuring the supply side and addressing job losses in the process of reform. Traditional heavy industries like steelmaking, coal and cement will be restructured. Excess real estate inventories will be cut as well as bank loans by converting them into equity holdings in efforts to ease the enormous corporate debt level and the dangers it poses to the financial sector.

The focus of the economy will shift to so-called new industries led by services and the high-tech information sector. The new economy includes e-commerce, new energy sources, semiconductors, automation machinery or robotics, Internet payments and finance.
Li said the government was setting aside 100 billion yuan ($15.4 billion) as unemployment reserves to help people losing jobs from the restructuring of old industries and retrain them for the new industries. Even as the economy has significantly slowed, new hires increased by more than 13 million in 2015 due to vitality in the services sector, Li said. He reiterated his confidence in the Chinese economy regardless of skeptical views from Western society.

There has been much hype about a looming China-triggered crisis. Chinese stocks and the yuan tumbled from the beginning of the year. The premier strongly denied any concerns about the economy let alone the possibility of a hard landing stemming from non-performing assets and some kind of financial crisis.

It is important to accurately discern the state of the Chinese economy: whether it is going on a stringent diet to fight overcapacity and excess or whether it is really chronically ailing. If it is the latter, Korean investors and businesses best exit now. If it is the former, they must be watchful for a leaner yet stronger economy after it is done with its transformation.

Even with all the media hype about dangers in the Chinese economy, none of Fortune’s top 500 enterprises has pulled out of the country. Korean conglomerates are no different. Streamlining, or reform in the supply-end structure, is the key to the Chinese economy this year. When Beijing announced the restructuring of six traditional industries, international steel prices rose and so have share prices of Korean steelmakers.

Restructuring of the manufacturing sector could be a boon for Korean competitors in the short term, but a threat over the long run. Once it cleans up its overcapacity, the Chinese manufacturing industry could be competitive enough to join the world’s top five. If Korea Inc. does not shore up its competitiveness fast, a bigger threat could be waiting around the corner.
Translation by the Korea JoongAng Daily staff.

JoongAng Sunday, March 20