Reading the tea leaves in China

Ask someone what China will do next, and you will get a myriad of answers that reference the RMB exchange rate, various political disputes, the environment, the race for natural resources and the balance of trade deficit.

Scratch the surface and more often than not you will find the opinion is based on an off-the-cuff analysis by some TV talking head or “China editorial.” Ironically, contrary to popular perception, China is more like a tortoise than a jackrabbit when it comes to process and policy. The best ways to develop your own ideas about China’s future are your own two eyes and a couple of week’s worth of part-time reading.

Each year, the Chinese government and the Communist Party meet in separate sessions to review and take actions on the goals and policies of the country.

Remember, do not make the mistake many do of equating the government and the Communist Party. Given the one-party system (technically there are many more, but that is a different topic), it is very tempting to equate them, but if you have ever known a bureaucrat who became a politician, or vice versa, you will understand what happens when someone shifts between policy and implementation.

For example, as a city party secretary in China, your role is to promote the central government policies identified in the five-year plan, while the mayor is responsible for implementing them. Technically, they are both responsible for the city’s progress, but this can mean very different things depending on the responsibilities and resources each has. Keep in mind that government promotions are as hyper competitive as promotions in the private sector, and you can imagine the rest. So, while it might be tempting to look at China’s system as monolithic in ideological terms, the reality on the micro level is a complex dynamic that depends on roles.

The yearly meetings are different in scope and length and technically follow the direction set in the previous five-year plan. Every five years, the party meets to review and promulgate a new five-year plan. The difference between what happens year to year and every fifth year is more about timing than substance, as they tend to be based on nuance and emphasis rather than directional shift.

If you have time to read the 16 five-year plans promulgated since new China’s birth, you will notice an almost monotonous repetition of formula which begins with a recitation of the progress made, an expressed desire to create a better society, the role and importance of the party and then a number of initiatives which form the basis of the next five-year plan. Rather than rejecting old ideas, carefully crafted sentences talk about review and knowledge. In essence, if you read each one of them back to back, you would see a series of small shifts in policies surrounded by language that has changed little.

New concepts like “Socialism with Chinese Characteristics,” “Deng Xiaoping Theory,” the “Three Represents” and “Scientific Outlook” creep in over the years, but they are heralded as experiential wisdom, rather than sea changes. In part, the size and nature of China may be part of the equation, as steering a ship this size requires carefully telegraphed messages and actions to keep it on course. There are also those who attribute this gradual approach to a cultural proclivity to be cautious when confronted by unknowns, others include a desire to clothe a revolutionary society in consistent terms, Regardless of why, 16 years of repetition has shown a strong adherence to the pattern.

So, why read these plans? The answer is that within the nuances and emphasis is the map to China’s future. Those who fail to understand this deprive themselves of one of the most vital pieces of information they need to understand and do business in China. As has been said before, while business seems to wag the dog in the United States, in China, there is no question business follows government.

One of the best indicators of what is to come is the plenum meetings that take place prior to each five-year plan. Recently, the Fifth Plenum of the 17th CPC Central Committee was held in Beijing, and 202 members and 163 alternates of the CPC Central Committee attended. Hu Jintao delivered the keynote speech. After a series of carefully orchestrated speeches and a number of comments that were offered up to the press, the meeting was closed, and the pundits and analysts went to work.

At this point, conventional wisdom is that the party has emphasized social development, as well as economic progress, meaning more social welfare efforts, such as providing over 400 million rural people with basic co-pay health care, encouraging the continued migration of people from rural to urban areas and increasing average wages. How this will be done and paid for has yet to come, but obviously they are banking on large year-on-year increases in GDP.

Tax reform was mentioned. Given the government’s concern about housing costs, which is in part fueled by the funds local governments get for leasing land, it is probable that increased attention will be paid to tax collection as a replacement revenue source. It is also probable that more attention will be focused on the rapidly growing disparity in wealth between the few and the many, which might take the form of new taxes.

To power the economy, China is emphasizing domestic market growth driven by a number of strategic industries, which currently account for 8 percent of the nation’s GDP. The goal is to have these industries account for 15 percent of the GDP by 2015. The industries include alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars and energy-saving and environmental protection. To promote these areas, the government will undoubtedly provide economic incentives and has signaled an open door, for now, to foreign venture capital firms and investors. It will also encourage domestic firms to seek ideas and have operations overseas and has indicated it will provide financial backing through its banks. The environment continues to get the nod in terms of emphasis but what this means in terms of action is unknown.

Internationally, the report indicated a belief that the international situation will continue to be shaky and that this will increase financial and political risk. Internally it has acknowledged a need to reform needless duplications in government, as well as increasing accountability. Various other issues were mentioned but, other than continuation of peaceful cross straits (Taiwan) initiative, they did not have much economic impact.

So, as you sit back and look into your crystal ball about what China’s markets could mean to you, read, think and place your bets.

Sign up for BizTimes Daily Alerts

Stay up-to-date on the people, companies and issues that impact business in Milwaukee and Southeast Wisconsin

No posts to display