An Historic Political Chinese Transition

En: http://www.linkedin.com/today/post/article/20121114205920-204274949-an-historic-chinese-political-transition

Mohamed El-Erian

Between the US presidential elections, the fiscal cliff and the Petraeus news, China’s historical political transition is attracting too little media attention. Yet its success is key to the wellbeing of the global economy.
The details of China’s new leadership will be announced on Thursday. They will point to more than a generational shift. They will constitute another step in the multi-year governance transition – from what essentially was a system tilted towards one-person rule towards governance by committee.
This comes at a tricky time for the Chinese economy. With a growth model that places significant emphasis on exports, the economy has inevitably slowed as Europe enters into recession and U.S. growth remains sluggish. The country is also navigating a developmental “middle income transition,” that involves complex evolutions in how the economy and policy operate. And this at a time when there is growing concern about income distribution.
Some are arguing that the new Chinese leadership is not up to this multi-faceted challenge. As such, they believe that the economy will “hard land” – meaning that average annual economic growth will fall well below the official target of 7% for the five year plan.
The implications for the global economy and markets would be consequential if this were to materialize. China is the second largest economy in the world, its major growth impetus, and the largest foreign investors for many countries (including in US government bonds).
While acknowledging that a Chinese hard landing constitutes a risk, it is not our baseline. Instead, our analysis points to a soft landing with growth stabilizing in the 6.5-7.5% range – a glide path that the new leadership is capable of achieving with incremental reforms to accelerate China's transition to more of a domestic demand-led growth model.
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