26 October 2016
A power struggle in the Communist Party is said to have sidelined Premier Li Keqiang, leaving President Xi Jinping the sole ruler of the country. Photo: Xinhua
A power struggle in the Communist Party is said to have sidelined Premier Li Keqiang, leaving President Xi Jinping the sole ruler of the country. Photo: Xinhua

Here comes the 2016 roller coaster

It’s that time of year again for forecasts.

But instead of 2016 being a year to look forward to, it’s something many people are dreading.

Judging by recent developments, it does not look very promising.

With the Legco election next year and the chief executive election a year later, Hong Kong is moving toward a political crossroads.

But nativism and social conflict aside, the coming year will be shaped by Hong Kong’s economic performance.

That very much depends on the success of ongoing reform in mainland China.

The renminbi has become part of the SDR (special drawing rights) basket and has overtaken the British pound to become the world’s third largest reserve currency.

However, that does not mean China’s growth prospects are assured.

With poor export performance and weak domestic demand, the mainland economy is likely to remain sluggish next year.

Any further economic downturn could trigger an influx of mainlanders into Hong Kong, legal or illegal, to look for jobs and seek a better life.

If that happens, it will deal a serious blow to our limited resources.

China’s political prospects will continue to be dictated by variables.

When Leung Chun-ying defeated pro-establishment favorite Henry Tang in the 2012 chief executive election, many saw the victory as a triumph for the so-called “communist youth faction” led by former president Hu Jintao over conservative forces headed by his predecessor, Jiang Zemin.

However, the triumph turned out to be short-lived after President Xi Jinping took power.

Premier Li Keqiang, who himself is also a heavyweight in the Hu faction, lost in a power struggle in the politburo, pushed to the sidelines by President Xi.

That means Xi is now the sole ruler of the country.

Hong Kong is also at the mercy of Xi, who is notorious for his relentless and ruthless crackdown on political opponents and dissenters.

In a recent open letter to the party leadership, Luo Yu, a childhood friend of President Xi and son of the late general Luo Ruiqing, one of the founding fathers of the People’s Republic of China, urged Xi to take a tough stance on corruption and stay the course.

Luo said the fight against graft is a matter of life and death for the party and the people.

At first glance, it appears that Xi has done absolutely the right thing.

However, his corruption crackdown produced some far-reaching and unexpected consequences for the economy.

In the past 37 years, state investment, exports and domestic demand have been the prime growth engine of China’s economy.

China held those three elements together by reducing the cost of transactions and providing incentives for local officials to embark on economic development programs.

However Xi’s unceasing purges of undesirable cadres, while applauded by the masses, have made local officials extremely wary about spending public money to stimulate the regional economy, lest they are perceived to be corrupt.

That is a big part of the reason the economy is stalling.

As the largest yuan offshore clearing center, Hong Kong could be critical to China’s economic strategy.

But its political situation is another matter.

Hong Kong remains deeply divided in the aftermath of the pro-democracy protests last year.

Any sign of social instability could spark a stampede out of the yuan.

If that happens, Beijing might take steps that could jeopardize Hong Kong’s role in the globalization of the Chinese currency.

No wonder many people are bearish about the mainland economy in 2016.

Of course, government officials and the pro-Beijing media and its political proxies will paint a different picture.

This article appeared in the Hong Kong Economic Journal on Dec. 9.

Translation by Alan Lee

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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