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Is a ‘Trust Deficit’ in China Destabilizing Growth?

Matt Clinch, special to CNBC.com
Friday, 14 Sep 2012 | 7:49 AM ET

The absence from the public stage of Xi Jinping, the next Chinese president, highlights the problems China faces in finding political stability at a time when its economy needs it most, economists and analysts told CNBC on Friday.

China's Vice President Xi Jinping
Getty Images
China's Vice President Xi Jinping

The current vice-president has not been seen in public since the beginning of September and has missed meetings with high-profile politicians including U.S. Secretary of State Hillary Clinton. Speculation has begun to grow, with rumorsthat he has suffered a heart attack, a stroke, or even an assassination attempt.

Chinese authorities and the media have remained silent on his location during this time.

Jonathan Fenby, Director of China Research at Trusted Sources, spoke of a Xi’s disappearance as being the latest in a long line of incidents that indicates the problems the ruling class face in the country.

“What this really shows is the extent to which secrecy and the difficulty of organizing politics in China at the top still prevails, despite all the attempts over the last ten years to get a much more smooth political mechanism in place,” he told CNBC Friday.

“That has implications for decision making, for how China’s economy is going to be steered in this pretty difficult moment.”

Fenby points to the rise of social media in China as being a prime example of how the communist party deal with the public.

“There are supposed to be 30,000 cyber cops, as they’re called, keeping a watch on the Internet,” he said.

“There is this gulf, what I call the ‘trust deficit’ in China between the mass of the people and the people in authority.”

August data from China showed exports fell by more than expected and industrial output grew at its slowest pace for more than three years.

Economists have altered their forecasts for Chinese gross domestic product (GDP)growth this year. The International Monetary Fund in July lowered its 2012 growth forecast to 8 percent from 8.2 percent.

Daniel Morris, Global Strategist at JP Morgan Asset Management, underlined how important political direction in China was at this crucial time.

“It’s presumed upon things picking up in China,” he told CNBC Friday.

“If we lack the political decision-making then that leads to a lack of economic change, then maybe we’re not going to see that rebound.”

Morris highlighted that stocks in the energy sectors in China had already responded negatively to the downward turn.

“If China were to slow down more than people expect right now then you kind of start to really run out of places to look for a growth engine. So, the potential downside is quite large,” he said.

Andy Xie, an independent economist, believes Chinese GDP won’t pick up soon, regardless of any opaqueness in the ruling class. He says investors need to be patient for any rebound.

“I think that slow growth is here to stay. China is going through transformation and the process will take years, I would say three years at least,” he told CNBC Thursday.

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