Twelve Challenges For China In 2012

The Diplomat has published an outline of twelve key challenges facing China in 2012, when it expects economic and social issues and questions over the looming leadership transition to reverberate both at home and abroad:

1) The run-up to Beijing’s once-in-a-decade political transition in October 2012 is likely to generate intensified clampdowns internally and assertive rhetoric abroad as China faces rising domestic challenges, and finds itself constrained internationally. Fearful neighbors may further strengthen ties with the United States. Pariah/failed state “allies” North Korea, Pakistan, and Iran will likely experience problems that affect China’s own interests. Externally, China is likely to be more intransigent than before. Internally, Beijing will resist making difficult decisions about economic reforms, particularly reforms that might harm key state-owned enterprises and monopolistic/oligopolistic concerns connected with families of political elites. Domestically and internationally, Chinese leaders will attempt to postpone difficult policy decisions until after the transition.

2) Slowing economic growth will likely increasingly expose the flaws and unsustainable nature of China’s infrastructure-driven growth model.One local banking regulator cited by Minxin Pei claims only 1/3 of the investment projects currently under construction will produce cash flows large enough to cover their debt service burden. This may rapidly reduce economic growth and commodity demand in 2012.

Damien Ma writes in The Atlantic that 2011 “saw the democratization of the China narrative,” and assesses the likelihood of rebalancing in 2012 as a number of “structural maladies” – including high inflation, employment, healthcare and education costs – continue to fester:

To me, one of the biggest questions next year is whether China can create the necessary political conditions, amid one of the most important transitions in a decade, to forge ahead with its restructuring. With the anticipated slow down in growth and a shrinking export surplus, there appears to be an opportunity to steer the ship of state in a different direction. Yet with a political leadership still unsettled, I find it hard to be optimistic over the extent of progress next year. But I am fully open to being surprised.

See also warnings by Wen Jiabao of a “difficult” start for China’s economy in 2012, via CDT.