The Call

China’s great rebalancing: The Party’s five-year to-do list

China’s great rebalancing: The Party’s five-year to-do list

By Michal Meidan

China’s leaders are now finalizing the draft of the twelfth Five-Year Plan, the blueprint that will set the stage for the country’s great "rebalancing" act. In the coming five years, the leaders of the Chinese Politburo aim to usher in a shift from the country’s current "unbalanced, unstable, uncoordinated, and unsustainable" growth model, toward one that is more socially equitable and environmentally sustainable. The "model workers" of yesterday will be at the forefront of China’s consumer revolution, singing a different "revolutionary song", and its corporate behemoths will lead the next industrial revolution.

Terms like Five-Year Plan, model workers, and revolutionary songs still have a whiff of old-style communism about them. In China’s case, they suggest a strong leader steering the country to its powerful rise and a political apparatus ready to mobilize the population to execute the plans of the Politburo – the small and mysterious body at the helm of the Communist Party.

In reality, Five-Year Plans are ambitious blueprints that signal a wish list. "Model workers" are a dubious species — ranging from billionaire CEOs dabbling in philanthropy to migrant workers who stage protests for higher wages. "Revolutionary songs" now sound strikingly like Taiwanese pop and are played on MP3 players. As for the mysterious politburo, forget Mao, Deng, and other ideological revolutionaries. Think MIT or Yale-equivalent engineering graduates. And after 2012, when a new generation of leaders takes the helm, imagine economists, lawyers, journalists, mathematicians, and historians staffing the Party’s ranks and you find an intriguing pluralism trapped in a Leninist structure.

How can such a system function? Judging by the past, the leadership can manage by being pragmatic and by building consensus. China’s leaders tend to debate, bargain, and reach lowest-common denominator solutions. They co-opt bureaucrats, industry groups, and provincial leaders, while trying to pay heed to an increasingly vocal public opinion, including among workers. They have the fiscal resources and enough political legitimacy to intervene in the market to drive outcomes. Coupled with a fundamental dynamism that comes with unleashing pent-up human and industrial potential, this has so far worked pretty well. China’s economy has managed impressive growth. The country’s human and geographic landscape has morphed over the course of three decades to create new megacities, industrial giants, and a small class of Chinese consumers. The Communist Party has been good at creating industrial and bureaucratic winners.

But in the coming years, as China’s leaders embark on their profoundly ambitious rebalancing act, they will have to transfer wealth from some of these winners to households in order to engineer a structural shift in the economy and to steer growth away from over-reliance on investments and exports toward consumption. Can they create new winners at the expense of the more powerful?

The odds are against them, because in order to take a piece of the pie from the strong, they will have to become a bit more confrontational. With an inherent aversion to confrontation, a more diverse group of leaders at the helm with ties to competing interest groups, and complex domestic and international issues that require coordination, it’s hard to see a new leadership tackling vested interests head on.

While this doesn’t bode well for an ambitious economic restructuring, it doesn’t foretell China’s collapse — or economic stagnation — either. The incoming leadership will be able to stick to its policy comfort zone and use administrative guidance to engineer some of its rebalancing agenda: spending more on welfare and a social safety net, drawing investments to relatively underdeveloped central and western China, creating greener and more technologically sophisticated industrial giants. At the same time, the new crop of leaders will probably be less averse to letting the market gain (a little) more say in capital and resource allocation, and will be more willing to experiment with tweaks to the system of governance.

As long as diversity within the leadership doesn’t create fractures that the Chinese public can see and economic growth remains robust, the Communist Party should be able to maintain the political legitimacy it needs to begin steering the country onto a new growth path.

For bolder reforms, though, China will have to wait for future Five-Year Plans, when its leaders and model workers hum to a different tune.

Michal Meidan is an analyst in Eurasia Group’s Asia practice.