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FACTBOX-Key political risks to watch in China

Source: Thomson Reuters Foundation - Tue, 19 Mar 2013 09:01 GMT
Author: Reuters
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BEIJING, March 19 (Reuters) - China has completed the country's second orderly political succession since the Communist Party took power in 1949, but new President Xi Jinping and Premier Li Keqiang face serious challenges at home and abroad.

Domestically the avowed priority is to keep the economy growing at the type of pace which has in large part sustained global growth for the past decade, while keeping on top of intensifying ground-level criticism of the costs of that rapid growth: inequality, corruption, and environmental degradation.

Internationally, China has shown signs it wants to mend frayed ties with Japan, keep the United States and its strategic focus on Asia at arm's length, and manage its growing frustration with North Korea without fatally undermining its troublesome neighbour.

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Following are the key risks to watch:

ECONOMIC REFORM, DISCONTENT AND REACTION

China has set a 7 percent annual economic growth target in its five-year plan that runs until 2015 and has pledged to double household income over the coming decade.

To do that will require a huge increase in economic productivity, and the team of senior officials appointed to take over the job suggests wasteful, indebted state-owned firms will be among the top targets for reform.

Almost no details of Premier Li's plans are yet known, and it may be months before the initial programme is unveiled, but Li is likely to concentrate on making fiscal changes that redistribute income and encourage private spending, and on reducing dependence on investment-led, export-oriented growth while building and populating the new cities that are intended to drive domestic economic activity.

The most recent official data showed that state-mandated fixed asset investment was the key driver of economic growth in the first two months of this year, up 21.2 percent and the strongest in 12 months, while annual retail sales growth of 12.3 percent was the slackest since 2004, underlining the fragility of China's recovery.

While attempting wide-ranging reforms, Chinese policymakers are acutely sensitive to unrest. The government has set aside 769.1 billion yuan (${esc.dollar}123.73 billion) for domestic security this year, once again a greater amount than it will spend on its military.

As internet chatrooms, microblogs and social networking sites become ever more popular and at the same time difficult to police, authorities are increasingly worried that what have so far been sporadic outbursts of anger may in time coalesce into serious unrest - a risk that will heighten if wages stop rising and economic opportunities shut down for China's hundreds of millions of inhabitants.

Corruption among political and industrial elites, and the terrible environmental damage caused by years of unfettered industrial expansion, are among the most inflammatory issues.

For the government, one of the greatest risks is that by over-reacting to a perceived threat or slight and ordering a disproportionately harsh response, it engenders far greater antipathy at home and brings unwelcome international attention on its practices.

What to watch:

- Details of the planned economic reforms and their impact.

- Growth, inflation and spending data.

- Levels of popular discontent, how they manifest themselves, and how the government responds.

DIPLOMACY

In the works for China's military are new submarines, ships, missiles, a stealth fighter, and aircraft carrier combat groups.

China has repeatedly said the world has nothing to fear from its military spending, which is around one-fifth of Washington's, but governments from Tokyo to Mumbai are worried about the capabilities and what appears to be the greater belligerence of China's military.

Over the past six months, China's stand-off with Japan over a series of uninhabited islands in the East China Sea has become more acrimonious, and has already led to calls in Tokyo for Japan to alter its pacifist constitution.

At the same time, Vietnam, the Philippines and other Southeast Asian nations have challenged Beijing over claims to swathes of the South China Sea that could be rich in oil and gas.

These conflicts are mainly diplomatic in nature and are deeply unlikely to lead to war, but a regional arms buildup - the most probable outcome of the disputes - increases tensions and makes international relations more fraught, especially against the backdrop of greater U.S. military involvement in Asia, where most countries count themselves allies of Washington.

Beijing's most immediate international headache is North Korea, which for decades it has supported on the basis that it forms a valuable buffer zone between China's border and the U.S.-backed South Koreans.

As Pyongyang's new regime becomes increasingly provocative with missile flights and nuclear tests, China will be forced to recalculate the utility of propping it up. Though it is extremely unlikely to abandon its neighbour and risk the North's collapse, Beijing has little desire to indefinitely back a country that is an embarrassment and an irritant diplomatically, and whose bellicosity garners almost no support among most Chinese.

What to watch:

- If and how disputes in the South China Sea are resolved.

- Military buildup in the region, particularly in Japan.

- The strength with which China enforces United Nations sanctions on North Korea, and the extent of its influence over decisionmaking in Pyongyang.

(${esc.dollar}1 = 6.2158 Chinese yuan) (Editing by Daniel Magnowski)

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