Purges and paranoia weaken China’s crisis defences

March 15, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Purges and paranoia are making an unwelcome comeback in China. Bo Xilai, the showman-like party chief of Chongqing municipality, was ousted on March 15 after a scandal surrounding a close aide drew a surprisingly sharp attack by outgoing premier Wen Jiabao. This spectacle makes little difference to China’s short-term ability to grow rapidly. But a divided China may be less well equipped to grow in the long term, or handle economic shocks.

Those who know why Bo was ousted aren’t saying. But signs of a rift are clear. Bo was a charismatic “princeling” – a revolutionary scion, who had appealed directly to the populace with economic reforms and old fashioned singalongs. Wen may have had Bo’s nostalgic campaigns in mind when he warned of a repeat of the Cultural Revolution, a grisly moment in China’s history when nationalist youths ran amok.

Investors will care less that Bo is no longer likely to appear on China’s reshuffled top table next year, and more about whether the country can continue to grow rapidly in 2012. That depends on whether banks will keep lending, and how much export customers continue to buy. But it’s likely that conservatives and reformists would want the same thing: to keep the engine humming, offering stimulus and recapitalising banks if needed.

But political infighting may make China’s growth less solid, because it disables needed reforms. Consider the question of whether or not to open up China’s capital flows. Conservatives argue that keeping them closed protected China from the global financial crisis. Reformists don’t disagree, but warn of the worrying excesses that result from financial repression, like property bubbles and badly directed investment. Over Wen’s ten-year rule, inaction looks to have mostly won out over change.

That probably isn’t sustainable. That property bubble looks fit to burst, and when it does it could create a multiplicity of simultaneous problems, from bank bad debts to bankrupt construction firms and angry homeowners. Sharply slowing retail sales and exports, and falling car sales in January and February, suggest an economic slowdown could come at the same time, calling for some serious creative thinking. Wen and Bo’s generation have fixated for a decade on stability. Their successors should worry more about paralysis and inaction.

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