China s Political Transition and its implications for business What to expect over THE NEXT 10 YEARS

Transcription

1 China s Political Transition and its implications for business What to expect over THE NEXT 10 YEARS Ian J. Stones & Simon Hunt The FRONTLINE China Report Presented by Ian J. Stones May 13 th 2013

2 Page:2 OVERVIEW 4 th - 5 th Leadership transition almost complete The process was relatively smooth Many challenges Economy Growth model must change Demographics Workforce declining, aging, sex imbalance Social Growing middle class, wealth gap, welfare, hukou Political - Pressure for change maintain CCP control Environment pollution and food safety 3 rd Plenum (October 2013) will define specific policies New visions ambiguous Chinese Dream vague Patriotism or nationalism? What role will China play in the world? A Few Predictions

3 Historical Context 4 Generations of Leadership n Mao / Zhu De, 8 Elders / 10 Marshals w w w n Deng Xiaoping Zhao Ziyang, Hu Yaobang Li Peng w w n Reform, Private Agriculture Plots, JV s, WOFE,s, Export oriented, Special Zones, Opening up, Strong Political Control, Tian anmen, Ideological extremes, Socialist or Capitalist, Market or Planning Jiang Zemin Zhu Rongji w w n Civil War, Long March, Anti Japanese War, Civil War, Korean War, Establish State, Economic Reform Central Planning System, Great Leap Forward, Heavy Industrial Development. Class struggle, Cultural Revolution, mass political movements, social experiments, communes, land reform ARMY grew up through 25 years of war WTO, Separate Government & Enterprise, Massive downsizing of government, Privatization, Access, Liberalization Strong Technocrats., Entrepreneurs become CCP members Hu Jintao / Wen Jiabao w w w w w GDP first Strong technocrats / administrators Social Agenda, People oriented promises did not deliver Managed WTO Accession open up Oversaw re-strengthening of Planning and SOE s Page:3

4 Page:4 5 th to 6 th Generation XI Jinping / LI Keqiang Younger, more international Matured in period of growth, prosperity & change Products of Selection & succession process Better educated (Post 1977) TRANSITION Economic & Social 6 th Generation Key people already selected No living memory of Cultural Revolution More plural environment

5 Page:5 4 th Generation - many unfulfilled expectations Privatization more was expected SOE s became bigger, more dominant Social agenda - disappointing Wealth gap - failed Anti Corruption failed Environment - failed Education - improved Healthcare reform started Safety net underfunded No Hukou reform inequality for rural people Stability First Demonstrations crushed Wide scope allowed in media BUT - No direct criticism of party / leaders Mainstream Religions / worship allowed Tight Control over Religious Sects Increased tolerance - cultural diversity Still jailed dissenters e.g Liu Xiaobo Right to Know (2003 after SARS) Changing role of Party Few reforms of government / party democracy Major Legitimacy Crisis with BO Xilai

6 Page:6 WEN s premiership COMPLEX By far the most difficult & complex premiership in China s history CRISES Series of crises and problems one after the other STATE SECTOR STRENGTHENED Saw State Sector grow, NDRC planning intervention WEALTH GAP WIDENED SOCIAL DISTURBANCES GREW Mainly land grabs, inequities, environment, illegal imprisonments, black jails UNINTENDED CONSEQUENCES energy, real estate, over capacity, failed champions EXPOSED NEED FOR CHANGE OF GOVERNANCE

7 Page:7 Complexity increasing Everything changing

8 CHANGING ROLE IN THE WORLD Ian Page:8 J. Stones

9 Page:9 MEGATRENDS ECONOMIC Must transition to new growth model Must move away from dependence on cheap labor/capital Must grow service sector Must urbanize SOCIAL Middle Class growing, wealth re-distribution DEMOGRAPHIC Aging crisis 2020 s Work force declining Sex Ratio imbalance worsening (>40 million excess males) POLITICAL CCP evolving to maintain power Incorporating more classes - businessmen & middle class DIPLOMATIC Challenge to US dominance including the US Dollar Move to multi-polar world BRICs, ASEAN, FTAs, Gulf, Central Asia

10 Page:10 XI / LI Biggest Challenges MAINTAIN STATUS OF COMMUNIST PARTY Anti Corruption / Rule of Law essential for legitimacy (Party / non party) Pressure for Political Change More diverse interests Dissent and social disturbances GOVERNANCE DOMESTIC AND INTERNATIONAL Local governments, SOE s INEFFICIENCY Bureaucratic red tape Capital wasted local govt. debt, high debt ratios, wasted investment, vanity projects, roads going nowhere, huge rail stations far from town centers ECONOMIC IMBALANCES Move to consumption not investment/cheap labor led growth Investment & Savings very high Manage Overcapacity DEMOGRAPHICS Aging Population, declining work force Social Safety net Retirement / Healthcare HOW TO URBANIZE HOW TO MOVE TO MARKET ECONOMY Domination and Excesses of SOE s DIPLOMATIC & MILITARY ASPIRATIONS Greater role and status in global affairs

11 Page:11 TRENDS TODAY Greater Access New Generations Global Leading Companies Global Status NEXT DECADE Labor Decline Wealthier RMB Freely Convertible More EFFICIENT

12 Page:12 Government Characteristics RULE BY PEOPLE Slow evolution to rule by institutions Transitioning gradually from 19th century feudal past to 21st century modern democratic system TOP DOWN DECISION MAKING Selection not Election Answer to the superiors above Fear of bottom up - answering to those below If a leader has set a policy, it s almost impossible to get it overturned from below Access bottom up is very difficult STATUS IMPORTANT - Very sensitive to status in relationships POWERFUL FAMILIES DOMINANT Top levels many people from families and protégés of the former 1st and 2 nd generation leadership circles. Influential families grew up together and are generally very well educated and politically astute. Most elite are very discrete STRONG CCP SUCCESSION PLANNING SYSTEM Leaders have been mentored over 20 years by previous leadership, but many in meritocracy are protégés of the older communist/military leaders. Everyone in senior position has at least one mentor who helped them on their way up GUANXI STILL IMPORTANT Closest guanxi are always family, comrades in arms & classmates COMPLEX INTEREST GROUPS Senior stakeholders can facilitate approvals if its good for China BE beware if an elite stakeholder is against what you want

13 Page:13 POLITICAL CHARACTERISTICS LEADING OLIGARCHY - ONE PARTY SYSTEM STATUS, PRIVILEGE & CORRUPTION EMBEDDED CULTURE SOE s, MONOPOLIES & RENT SEEKING BEHAVIOUR Big influence with CCP and regulators PARTY ABOVE THE LAW CONTROLS LEGAL SYSTEM Many Taboo subjects & Sensitive Problems Dissent not tolerated Censorship & control of media POLITICIZE BUSINESS After LIU Xiaobo Nobel prize punished Norway Some SOE s claim national interest or national security interest Punish countries whose leaders meet Dalai Lama Anti-Japanese business campaigns related to islands dispute REFORMS GRADUAL Incorporating more social classes / stakeholders Competitive Elections - no debate Town Hall meetings Intra-Party democracy

14 Page:14 NO MAJOR POLITICAL CHANGE WU Bangguo March 2011 五个 不搞 不搞多党轮流执政 不搞指导思想多元化 不搞 三权分立 和两院制 不搞联邦制 不搞私有化 FIVE NO s NO Multi-party changes of government power NO Multiple ideologies NO Separation of Powers or 2 house division of power NO Federalization NO Privatization

15 Page:15 TABOO SUBJECTS freedom of the press civil society civic rights Communist Party historical mistakes elite cronyism independent judiciary

16 Page:16 CCP Legitimacy questioned Corruption, Scandals, Nepotism recognized as major sources of public distrust Surveys show VERY LOW trust for local officials People s Daily Survey pulled down within 3 hours 80% of respondents didn t trust the party BO Xilai scandal reflected internal disputes, personality cults, ignored rule of law fight black campaign Why do very senior leaders get arrested? LIU Zhijun (Rail Minister) and many other scandals

17 Dilemma Is the Party still communist? Challenges to the Party Dominance 2002 Deng Liqun openly attacked Jiang No right to claim he represents the Communist Party Question the role and NAME of the party. What will the role of the party be if China is a privatized national economy No longer represents the proletariat More Petitions for Rule of Law and the Constitution Hukou reform equal opportunity. What does Party Internal Democracy mean? What will China s Dream be? What does Patriotic mean? When will open elections start?

18 Page:18 The Chinese Dream - vague not defined Rejuvenation Regain status in the world Greater role on world stage soft diplomacy Strong military Collective not individualistic Socialist Values

19 Page:19 CULTURE & VALUES EVOLUTION Increasing nationalism (patriotism) Greater Assertiveness Lower tolerance for corruption COLLECTIVE V.S Individualist Beijing Spirit PATRIOTISM, Ethics, Inclusiveness, Innovation Shanghai Promoting Socialist Values Post 80 s Post 90 s cohorts different Not interested in politics More individualistic (lower collectivist) 1 child families smaller and fewer extended families Lower respect for authority (lower PDI)

20 Page:20 Transition to Rule of Law - slow Announce end of Reform Through Labor Supreme Court says defense lawyers serve an important role Talk about abiding by the constitution Dissidents still harassed, often charged with subversion Huge police turn-out when social disturbances occur Internet monitored & controlled New York Times, Bloomberg, Twitter, Facebook, blogs, still blocked Vocal bloggers get shut down for 1-3 days

21 Page:21 POSITIVES Optimism that this leadership wants to get things done New vision - guiding theme for longer-term reforms. Confidence, austerity and a less rigid work style at the top have set the stage for many small changes Key positions filled and a core of older finance sector leaders is staying on after the usual retirement age 6 th generation leadership candidates already being cultivated More youth and reform oriented talent in key positions at all levels Government streamlining has taken one more step. Other central agency mergers are on the horizon. Fighting corruption is seen as essential to the CCP survival. It will be sustained and lead to officials declaration of assets. A longer-term approach to policy reform means less likelihood for short-term policy swings which tend to have unintended consequences.

22 Page:22 POSITIVE CHANGES IN LEADERSHIP STYLE Speak without written scripts Shorter meetings, shorter reports Get straight to the point More transparency Wider ranges of views / stakeholders considered Longer term approach less knee jerk short term solutions Less entertainment / socializing

23 Page:23 Reform plans to announced at 3 rd CCP Plenum OCTOBER KEY AREAS FOR REFORM 1. Administrative structure 2. Financial regulation 3. Fiscal budgeting 4. Railway sector 5. Energy & resource pricing 6. Social welfare 7. Urbanization 8. Rural issues 9. Technological innovation CONSENSUS ACHIEVED 1. Affordable housing 2. Pension reform 3. Regulation of food and drug quality CONSENSUS NOT ACHIEVED 1. Govt. budget reform 2. Resources product tax 3. Timing and pricing for resources Water Minerals Land Energy 4. Capital account opening Increasing the convertibility of capital accounts Detailed process 5. Investment structure & management of railway sectors 6. Mid & long-term plans for urbanization

24 Page:24 The Next Decade KEY POINTS New phase in growth beginning quality vs. quantity 3 rd Phase of economic & business reforms INSTITUTIONAL DIVIDEND - efficiency a main driver Final No-go areas opening RMB convertibility, Finance, Media, resources Role of Government changing Reduced state role in business Provide institutional environment for market economy Greater stakeholder engagement more complex interests to balance Gradual transition to rule of law Huge problems will be addressed Social concerns Aging Population / 40 million excess males Income, Health & Welfare Gap / Inequity Resources, Energy, Environment Governance Rule of Law / Social Disputes Corporate Strategy must take Chinese characteristics

25 What to expect for business Slowing GDP growth Tighter labor markets increasing costs / turnover Rules of the game will continue to change More reforms Greater efficiency More Transparent Increasingly complex stakeholder issues Foreign businesses less important MNCs and SOE s both lose their privileged status Approvals, Tax, Capital, technology, IP More Level Playing field institutionally Competition stronger Different basis for competitiveness Chinese firms will become more global Integrate foreign managers / partners

26 Page:26 HISTORICAL CONTEXT 1978 Planned economy % of production was planned Almost 100% state ownership million units. 110 ministries 80% rural, 20% urban 90% population in poverty Iron rice bowl (cradle to grave state welfare) nd Largest Economy in the world 116 Central SASAC companies, 60,000 SOE s 51% Urbanized Some Chinese companies foraying overseas RMB restricted Large Social Gap / Social inequity 2023 Privately owned vibrant MARKET economy 1 st /2 nd in world < 30 Strategic SOE s 65% urbanized Universal Social welfare 200 Global Leading companies globally integrated Mature Financial Markets Freely convertible RMB (RMB reserve currency) CCP Oligarchy still in place / but role evolved

27 Page:27 DIALOGUE

28 Page:28 Supplementary Slides

29 Page:29 Stakeholder Relationships - will get increasingly complex International Courts General Contractor POLICE UN & transnational institutions Global Shareholders Global NGOS International Governance Bodies International Lawyer(s) Trade Suppliers Foreign Embassies International Press International Partner(s) Employees Shareholders Popular Media CIETAC Arbitration Commission Offshore Financiers Deal Maker(s) JV /acquired co Management Employees Suppliers PRC Domestic Media Onshore Financiers PRC Courts PRC Partner(s) Employees UNION Local Communities Regulatory Bureau Foreign Communities Minority Interests Party Leadership Customers PRC Lawyer(s) Activists Global Consumer Groups State Council Municipal & Provincial Government Consumer Groups NGO s