February 07, 2008

China: cracks show in the ice

Source : OXFORD ANALYTICA

Life is becoming more difficult in China, for people and policymakers alike. The immediate problem for millions this year has been the freeze. Ice and snow have brought power lines down and closed highways and rail services. President Hu Jintao has presided over two Politburo meetings called specifically to discuss the extreme weather. Members of the nine-man Politburo Standing Commission (PSC) have fanned out across badly affected areas in a propaganda blitz intended to demonstrate their utmost concern.

The snow might seem a temporary distraction: blizzards blow over; lines get reconnected; normal services resume. The government can give the economy a policy prod to make up for lost activity. However, the cold spell has thrown some accumulating problems into relief: infrastructure weaknesses, energy shortages and inflation all predate the bad weather:

For all the investment thrown at it over past years, infrastructure has shown itself wanting in a crisis. Granted, it has had to cope with extreme conditions, but why such widespread disruption?
Policy may have made energy shortfalls worse. Beijing has kept energy prices down while costs have risen dramatically on international markets, leaving domestic producers with little incentive to supply.

Late last year the Politburo met not to discuss the weather, but inflation. The 2007 consumer price index (CPI) rose 4.8%, peaking at 6.9% in November, driven up by food. Prices have spiked during the freeze despite the clampdown underway before the weather turned. The CPI could now rise close to 7.0%.

People will eventually stop complaining about the snow, but they will moan forever if prices keep climbing and energy keeps being rationed. Add to this the grumblings of millions who piled into the stock markets last year. Coming into February the stock market had lost around 30% since its mid-October peak. It can be expected to bounce around bungee-like this year, at some discomfort to small investors.

Elsewhere, despite the priority accorded the rural economy over the past five years, the countryside continues to fall behind. The government tweaks policy where it can to support incomes. But the more it pumps into the countryside to prop it up, the more resentment is likely to build among the urban poor.

Mention will be made of the snow at the March National People’s Congress. However, more time will be devoted to longer-term problems. The leadership has managed to avoid slipping up badly on the ice. But will it do anymore than tread water when it comes to fundamental policy?

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