Chinaâ€™s next debt crisis will be a local affair

Neighbourhood watch

Business Standard

Hack attacks may be Westâ€™s cue to try harder

Hacks and hack-nots

China&rsquo;s upcoming Party Congress is a rare chance to see what troubles China&rsquo;s authorities. This year, the list of identified threats includes pigeons, taxi passengers and kitchen knives. It sounds like overzealous bureaucracy ahead of a once-in-a-decade leadership transition. But it&rsquo;s to the outgoing leaders&rsquo; credit that even without such rules, China remains basically economically and socially stable.

Party crashers

Corruption is to China what bad weather is to Britain &mdash; a source of constant complaint, and a fact of life. But the rise of the Internet and slowing growth mean China can&rsquo;t continue along its old path. Incoming President Xi Jinping and his chief graft-buster Wang Qishan have a chance to slay the beast. Enforcement, education and the market will be their most effective weapons.

The three-headed beast

The seven men who will run China&rsquo;s ruling party for the next five years have a tough job. Two of them, party chief Xi Jinping and premier-in-waiting Li Keqiang, have been groomed for years, but even they are little known. Are they up to it? Breakingviews has scored them on five key criteria, and found some scope for encouragement.

Report cadre

State-owned enterprises are China&rsquo;s economic version of the giant vampire squid. The 20,253 industrial companies owned and controlled by the government soak up capital, and pay little out. Their costs are low and their bosses powerful. If China&rsquo;s new leaders are serious about making households wealthy, they need to make these industrial giants behave more like normal companies.

SOE monsters

Hu Jintao has left China&rsquo;s next leader a parting gift: a new financial target. The outgoing head of the Communist Party told delegates to its five-yearly party conference that the country should double GDP per head in both rural and urban areas from 2010 to 2020. That&rsquo;s only achievable if the next generation make changes Hu and his colleagues shied away from.

Legacy of toil

What does China want? Sustained growth, and happier citizens. How will it get there? Through economic reform. It sounds simple enough.

Reform over substance

Fix one problem, and along comes another. On the day China expelled disgraced politician Bo Xilai from its parliament, a New York Times investigation alleged that Premier Wen Jiabao&rsquo;s family controls financial assets worth $2.7 billion. The suggestion is explosive, particularly of a leader who has spoken out about inequality. But it is also mundane, and won&rsquo;t much change the calculus for investors in the People&rsquo;s Republic.

Inside story

Softbank chief executive Masayoshi Son has received a strong signal from investors. They wiped $6.2 billion in value off the Japanese telecoms operator&rsquo;s market value on October 12 after it confirmed it was in talks with US rival Sprint Nextel. That&rsquo;s three times more than US investors added to Sprint&rsquo;s worth the previous day. No wonder: a takeover would be a financial stretch for Softbank, and could preclude other deals closer to home.

Bad reception

If China wants a bigger say at the International Monetary Fund (IMF), boycotting the fund&rsquo;s meeting in Japan is the wrong way to get it. The head of the central bank, Zhou Xiaochuan, withdrew on October 10, amid a territorial dispute between the two countries. Yet, the IMF is supposed to be about finance, not border politics. If China doesn&rsquo;t agree, maybe it isn&rsquo;t ready for a bigger role.

Tokyo bypass

Earning the trust of Americans is proving a Sisyphean task for Huawei. The Chinese telecom supplier has consistently fought reports of too-close ties to the People&rsquo;s Liberation Army and undue influence from Beijing. Now a panel of US congressmen has publicly labelled the employee-owned group and its rival ZTE a security threat. True or not, the accusation is a serious blow.

Quit bugging me

China&rsquo;s shaky accounting practices are a sound target for US regulators. Or at least, they would have been 10 years ago. The Securities and Exchange Commission (SEC)&rsquo;s action against China-based auditors, including affiliates of big accountants like KPMG and Deloitte who refuse to hand over files on US-listed companies, comes too late. If the SEC pushes the point, it could bring a moral victory, but a financial mess.

Goodwill writedown

Bob Benmosche is making AIG more aerodynamic &mdash; at a price. The US insurer has agreed to sell its aircraft leasing business to a Chinese-led group for a valuation of $5.3 billion. AIG&rsquo;s own shareholders will probably forgive their chief executive for the mean headline number and the lack of a clean exit, and focus on the fact that AIG is a step closer to independence from its government shareholder.

Chocks away

China&rsquo;s future lies in building bigger, better cities &mdash; then giving everyone a fair chance to live in them. For over 50 years, the &ldquo;hukou&rdquo; system of household registration has prevented free movement, and controlled where and how people live. This inhumane system is changing, but too slowly. It belongs on history&rsquo;s scrapheap.

Urban jumble

What&rsquo;s really going on in China&rsquo;s economy? It depends where you look. Numbers abound, but good explanations are scarce. Take the country&rsquo;s Gross Domestic Product: it showed year-on-year growth of 7.6 per cent in the second quarter of 2012, a whisker above the official goal. Yet vice premier Li Keqiang famously referred to GDP as &ldquo;man-made&rdquo; and therefore unreliable, according to a cable published by Wikileaks. Many academics and economists agree.

Reading the tea leaves

China&rsquo;s growth is slowing, and president-in-waiting Xi Jinping hasn&rsquo;t been seen in public for two weeks. China-watchers are discussing little else. The former issue matters greatly to the world, while the latter is fascinating, but basically unimportant.

Xi's not there

Are consumers China&rsquo;s secret weapon? Not when it comes to winning its ongoing spat with Japan. Even if some Chinese shoppers are giving Uniqlo and Toyota a miss, history shows that consumer boycotts have at best a short-lived effect. Economic warfare looks reassuringly hard to wage.

Store wars

The weekend&rsquo;s anti-Japan protests in China, triggered by a dispute over who owns some contested islands, looked a lot like scenes from 2005. Then, anger was directed at Japan&rsquo;s bid for a seat on the UN security council, and the contents of a Japanese history text book. As now, it looked seven years ago as if protests were being tolerated by the Chinese government. What&rsquo;s different this time is economic uncertainty. The cost of letting things get out of hand is also considerably higher.

Fighting history

The success of China&rsquo;s art market points to a broader financial failure. Sotheby&rsquo;s decision to start running auctions on the mainland through a joint venture shows the country&rsquo;s art market is working very well indeed. It&rsquo;s mainly a sign that other markets aren&rsquo;t working as they should.

Gold brush

Will they or won&rsquo;t they? Every time Temasek tinkers with its portfolio, the Singaporean fund revives speculation that it might also sell its 18 per cent stake in Standard Chartered. Temasek&rsquo;s decision to offload $1.1 billion of shares in Singapore Telecom has stirred up the question again. But one sale offers few clues about the other.

John Foley