Liam Dann 's Opinion

Liam Dann is the business editor of the NZ Herald

Liam Dann: China has real power over economy

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Decisions made by Chinese Communist Party affect lives of Kiwis just as much as those made on Wall Street.

F&P's Stuart Broadhurst, left, shows Chinese Vice President Xi Jinping around their East Tamaki plant in 2010. Photo / NZPA
F&P's Stuart Broadhurst, left, shows Chinese Vice President Xi Jinping around their East Tamaki plant in 2010. Photo / NZPA

Right, so last week the US elections, this week the Chinese ones. Well, sort of elections. I think there might be some voting by the elite delegates at the seven-day party Congress that finishes tomorrow.

Either way, it's a bit like the US version in one respect. Lots of pomp and ceremony and it ends in a predictable result.

All the smart money was already pointing to the anointment of F&P Appliances visiting Vice-President Xi Jinping as new General Secretary of the Communist Party. One suspects there was even less margin for error than in the exhaustive US polls.

Xi visited New Zealand in 2010 and was offered a tour of F&P Appliances' East Tamaki Plant. He noted the partnership between F&P and Haier was "of a strategic nature" and the two companies would "share the market and technology".

The Business Herald reported that, passing through a company staff room, Xi commented that it was "a very good environment".

Whether that was the tick of approval Haier (which is still partially state- controlled) needed we'll never know.

Perhaps if someone had failed to clean up the cheese toasty maker and forgotten to put their coffee mug in the dishwasher F&P would still be locally owned.

But the man about to become the most powerful in China liked the lunch rooms and Haier has gone on to buy the whole company.

Seriously, though, rather unlike Barack Obama, the new leader of the Communist Party will have real power over the domestic economy - and therefore more direct influence on our fortunes.

Outgoing leader Hu JinTao made it pretty clear in his 100-minute departure speech that China's ruling party is not about to relinquish any central control of the economy.

Why would they want to do that? Just look at the state of the US. Start getting soft on central control and next minute you'll have Qinghai province legalising pot and you'll be begging to the Central committee for approval to deal with the national debt to avoid bankruptcy.

Actually, the Chinese are happy to avoid that debt thing altogether.

No, the new leader and his elite Politburo Standing Committee will retain the kind of real power that Barack Obama can only dream about.

While the US President is battling to keep the country solvent the new standing committee of the Communist Party will be deciding exactly what the Chinese economic growth rate should be and then implementing policy to make that happen.

Just about the only economic variable over which the Chinese administration has no control is global demand for Chinese goods.

It has enormous control over capital within the country. Forget about printing money, they've already got too much of the stuff.

The country has cash reserves of something like US$3 trillion ($3.6 trillion). That'll buy a lot of cycle ways if they need to create some jobs.

The potential they have to stimulate domestic growth is almost unimaginable and it has not yet been seriously employed as the Chinese Government still has a strong focus on keeping growth in check. If they don't like the cut of that domestic growth's jib, they do something about it.

Last year, when there were concerns about an overheated property market, the state slapped a two-property limit on all mortgage lending. That meant they briefly stopped property development in its tracks for all but those who could afford to build without borrowing. That sort of thing is probably pretty ugly for those in the middle of doing business but you don't hear a lot of complaining.

Kiwi-style hand wringing over the value of the currency and the scope of Government spending is minimised by ensuring you have like-minded thinkers in key positions.

The Organisation Department of the Communist Party of China Central Committee - which appoints personnel - has been described by Richard McGregor in the Financial Times as having the equivalent US power of overseeing "the appointments of US state governors and their deputies; the mayors of big cities; heads of federal regulatory agencies; the chief executives of General Electric, ExxonMobil, Walmart and 50-odd of the remaining largest companies; justices on the Supreme Court; the editors of the New York Times, the Wall Street Journal and the Washington Post, the bosses of the television networks and cable stations, the presidents of Yale and Harvard and other big universities and the heads of think-tanks such as the Brookings Institution and the Heritage Foundation."

That is going to speed things up.

There is always a risk that large global forces can catch a small group of key decision-makers off guard, that China's establishment might get it wrong and the economy could get away on them or slump harder than has been preordained. There is also, as Hu JinTao recognised in his speech, the risk that corruption can undermine the system.

But the combination of great wealth and great control makes China unique in the world.

We can bemoan the lack of free speech and democratic process. We should always do our best to highlight the virtues of the individual freedom our system offers. But whatever we think or do, we shouldn't kid ourselves about having serious influence over political reality in the country we are increasingly relying on for our economic growth.

Given the mess the US banking system has just made for the world, and the lack of democratic process around Western capital markets generally, it isn't necessarily such a clear-cut, black and white moral debate.

Both systems have issues. What is important is for New Zealanders to understand both systems because we are going to keep doing business with both of them. We are more dependent than ever on strong Chinese GDP growth. It underpins the dairy price and the price of hard commodities like coal.

While the US and its fiscal cliff are going to rattle markets and hog headlines for the next few weeks, those with an eye on forecasting the economic weather would do as well to watch closely for the declarations and pronouncements of the new Chinese establishment.

They can be subtle and mysterious but their implications can reach directly to the working lives of New Zealanders every bit as much as the rises and falls of Wall Street.

- NZ Herald

Liam Dann

Liam Dann is the business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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