China's leaders try to change economic growth model

John Garnaut
December 1, 2008

CHINA'S economic challenges are now so serious that they are a test of the Communist Party's ability to govern, says President Hu Jintao.

Mr Hu's warning to the Communist Party's Politburo over the weekend suggests leaders have been shaken by a wave of riots and protests that hit at least eight provinces in November.

It also confirms the economic data for November will be much worse than October and that the leadership expects conditions to deteriorate further.

Anecdotal reports suggest millions of workers have lost their jobs, especially in export manufacturing, construction and heavy industry, although China is yet to develop any reliable unemployment data.

"Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development is a test of our Party's capacity to govern," said President Hu, who is also general secretary of the Communist Party.

Mr Hu's warning is the first by a high-level official to directly link the current economic challenges to the Party's legitimacy.

But his comments are the latest in a series of increasingly alarming official warnings about China's economic vulnerabilities and the risk of social instability.

Zhang Ping, chairman of the key economic policy agency, the National Development and Reform Commission, warned on Thursday that "economic indicators point to an accelerated slowdown in November".

"Excessive production cuts and closures of businesses will cause massive unemployment, which will lead to instability," Mr Zhang said.

Last week the central bank cut rates by a full percentage point and earlier in the month the Government unveiled a 4 trillion yuan ($897 billion) spending program to boost the economy.

But Mr Zhang said the spending would only add about 1 percentage point to China's GDP, implicitly admitting that most of the money would not be "new".

The full impact of collapsing consumer spending in Western countries is only now being felt in China, as export orders typically take more than a month to flow through to actual shipments.

The slowdown is "reducing external demand and exerting pressure to steadily weaken our country's traditional competitive advantages," Mr Hu said.

Mr Hu urged Party leaders to increase efforts to reform China's economic growth model, which remains overwhelmingly dependent on building construction.

Mr Hu also wants to build a "harmonious" society by spending money on social services and the disadvantaged countryside.