Letter from China

As the Year of the Dragon draws to a close it is the custom to speculate over what the Year of the Snake will hold.

China’s political transition to the "fifth generation" of leaders is just about accomplished (and smoothly so) and it is clear that the economy bottomed out in the third quarter of last year.

Gross domestic product (GDP) growth of 7.9% in the fourth quarter, versus 7.4% in the third quarter, and full-year growth for 2012 of 7.8%, again puts China in a class of its own, as the only large economy growing at such a rapid rate. And the latest key indicators — retail sales, the purchasing managers’ index, industrial production and fixed asset investment —-are convincingly pointing higher. So for this year it looks like another year of business as usual – China style.

Well, perhaps not.

Despite these positive growth signals there are important areas in Chinese society that must change, for the story to end well. Indeed, for China the challenge over the next few years is not just to grow, but to transform.

The key is to change in the right areas, in the right direction and at the appropriate pace.

But old habits die hard and China is a complex country. This brings resistance and injects risk into the equation. Still, most agree that the new leadership will in 10 years leave behind a very different China from the one they inherited late last year.

Accordingly, they must determine the priority areas and manner in which the country must adapt and reposition itself. Above all, they must carefully gauge the capacity for change and set the appropriate speed — not too fast, not too slow.

This will not be easy, but not to change and not to transform would render future economic gains harder and eventually result in too many hot issues to manage simultaneously. Ultimately China’s new leaders’ will write their own legacy by how they manage this process. There is no template or recipe for success, but strategic choices and judgment over time will yield outcomes that will be testimony to their work.

While there are daunting transformation challenges on the horizon, Beijing has demonstrated an enormous capacity to manage the agenda of the day. Several burning issues rank high on the current agenda.

Environmental management and sustainability considerations must become a central element of all planning. Over the past two weeks pollution in Beijing was as bad as I have seen it during my time in Asia, now almost two decades. Importantly, one could sense from people that growth at any cost is no longer an option, if it means breathing such air.

Widespread corruption must be systematically dealt with. Common people have over the past two years become more vocal in expressing their dissatisfaction with deeply rooted corruption. Related to this, the formation of an elite class, super-wealthy, often with top party connections, has become a sensitive issue. The widening gap in income and wealth has now become critical for Beijing’s planners to address.

Another complicated transformation is to orient the economy more towards domestic consumption. This is under way, but more progress must be made. At the same time the manufacturing sector must increase its innovation, productivity and competitiveness if it is to compete effectively with developed countries such as the US and Germany and developing countries such as Mexico, India, Indonesia and Vietnam.

China, as a rising superpower, must also manage international relations and perceptions carefully as it pursues integration with the world. For example, its approach towards its neighbours, in dealing with rising tensions in the South China Sea, will have to be carefully calibrated. Also, its stance towards the US — given that nation’s tilt to Asia — will inevitably reveal how the new Chinese leadership would like to position China internationally.

The action list goes on.

While some of these are prickly issues, China has demonstrated its strategic acumen and pragmatism in managing its own transformation. So while the economy will grow for another year, probably at about 8%, the more important issue is that the leadership will also continuously grapple with the deeper, more fundamental aspects of its society. It is this deeper, inevitable transformation that will ensure China’s longevity and make its rise a truly long-term phenomenon.

For SA and Africa two trends are relevant: China’s capacity and intent to grow its overseas foreign direct investment, and the almost endless scope for growth in its domestic consumption. These spell opportunity.

Van der Wath is group MD of The Beijing Axis. He can be reached at kobus@thebeijing axis.com.