China's politics - lost in transition

It shouldn't take Monday's National Day to remind investors that politics in China matter. The country is the biggest holder of foreign currency reserves, the biggest car market, the world's largest exporter of goods, and home to the world's biggest bank by market capitalisation and the largest number of internet users. Who rules over all of that matters.

The next generation of leaders will step up to take the helm from president Hu Jintao and premier Wen Jiabao as part of China's leadership transition in the coming weeks (the exact date has yet to be announced).

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They came to power a decade ago. Mr Hu's stamp has been "yi ren wei ben", or putting people first, with an emphasis on state enterprises, employment rights and rural China. His 2008 reform to allow farmers to transfer land-use rights for money was key to that. Mr Wen has presided over economic development to deliver average annual output of almost 11 per cent.

But Mr Hu's emphasis has created challenges. The fiscal stimulus package launched in 2009 to counter the slowdown in the wake of the global crisis overwhelmingly supported state companies and investment. Policy assistance toward struggling smaller private enterprises is largely absent (the Wenzhou pilot has yet to prove fruitful). The stock market has returned just 55 per cent over the decade, or a compound return of just 6 per cent each year during this leadership's tenure.

Fixed asset investment as a proportion of gross domestic product has doubled to two-thirds. And while wage growth has boosted consumption by an average of 16 per cent each year, retail sales as a proportion of output have remained static at two-fifths. In spite of the focus on lower income groups, the wealth gap has also widened. Costs are rising as China's manufacturers struggle to climb the value chain. China's new leaders have their work cut out.

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