Growth on trackBeijing needs torebalance itspolicy towardsconsumptionPage 2

Inside »

Crowded automarket strugglesManufacturers viewith global rivalsto gain tractionPage 2

Stopping the rotVice-premier hasthe daunting taskof rooting outillegal paymentsPage 4

Cross-straitinvestment risesTrade pacts helpthaw oncefrosty relationsPage 4

Celestial capitalArchitecture,exhibitions andcuisine attractthe inquisitivePage 4

FT SPECIAL REPORT

ChinaWednesday December 12 2012 www.ft.com/reports | twitter.com/ftreports

When the man anointed torule China for the nextdecade addressed hisnew subjects for the firsttime on November 15 his

speech was refreshingly free of thestale political slogans favoured byoutgoing Chinese president Hu Jintao.

In his booming, accentless Manda-rin, Xi Jinping mentioned the word“socialism” only once and used a sig-nificant portion of his short address tocriticise the Communist party heleads.

“Our party faces many severe chal-lenges and there are many pressingproblems within the party that needto be resolved,” Mr Xi told the nationin a live televised address. The newleadership must “effectively deal withthe prominent issues within the party;earnestly improve the party’s workstyle and maintain close ties with thepeople”.

As speeches by Chinese leaders go,this one was a remarkably frankadmission of the huge problems fac-ing the authoritarian party that has

led the world’s most populous nationsince 1949. In a clear attempt to differ-entiate himself from his technocraticpredecessor, Mr Xi said the partymust make “great efforts” to avoidplacing “undue emphasis on formalityand bureaucracy”.

He stressed the need to crack downon rampant corruption and bribe-taking within the party and govern-ment and to improve social servicesand environmental protection.

Since the madness of Mao Zedong’sCultural Revolution ended with hisdeath in 1976 the country has wit-nessed one of the most impressiveperiods of economic growth in history.

The past decade in particular sawChina’s economy grow rapidly, in-creasing from the world’s sixth larg-est to the second largest, accompaniedby low inflation and a benign interna-tional environment, at least from Bei-jing’s perspective.

Most Chinese academics and gov-ernment officials agree Mr Xi and hisincoming administration will not havethe luxury of such powerful forces

pulling in their direction. This ispartly because the Hu Jintao adminis-tration, despite overseeing what wasperhaps the greatest period of pros-perity in centuries, did not seriouslyattempt to enact economic and politi-cal reforms that could have put thecountry on a more sustainable path.

“Hu [Jintao] and friends will beremembered for transitioning the[People’s Republic of China] from aregional to a global power, but theyactually deserve little credit for that;it was going to happen no matter whohelmed the country,” write DerekScissors and Dean Cheng at the Wash-ington DC-based Heritage Foundation.“Their decade leading the PRC shouldbe viewed largely as one of lost oppor-tunities, even failure.”

They argue that, in 2002, when MrHu and his colleagues took power,China boasted sustainable growthof more than 8 per cent, income

inequality appeared at least to bemanage-able, investment and con-sumption were roughly balanced andthe banking system had been over-hauled after teetering on the edge ofinsolvency five years earlier.

This year the economy is expectedto grow just over 7.5 per cent, itsslowest pace since 1999, and invest-ment far outstrips household con-sumption as a share of GDP.

In response to the 2008 global finan-cial crisis, Beijing ordered state-owned banks to flood the economywith cheap loans to prop up flagginggrowth, prompting an enormousexpansion of credit that economistsworry will ultimately not be repaid.

Thanks to huge overuse of water,coal and other resources, and blatantdisregard for environmental lawsand regulations, China is arguablythe most polluted place on earth,with environmental concerns an

Continued on Page 2Xi Jinping, incoming president, left, and Li Keqiang, the incoming premier Reuters

‘In the next 10 years thebiggest crisis for thegovernment will be acrisis of legitimacy’

New leadersface toughchallengesSuccessfully navigating Beijing’s difficultpolitical environment could result in an era ofradical social change, says Jamil Anderlini

By the time you finish read-ing this article, more than400 Chinese people will haveleft the countryside and putdown new roots in a city.

China’s cities, whichalready house a tenth of theworld’s population, areswelling every minute. It isthe largest migration in hu-man history, and is a driv-ing force behind China’sdemand for everything fromsteel to sugar to electricity.

Perhaps more surpris-ingly, cities have become akey front in the country’sfight against pollution andefforts to shift toward moresustainable growth.

China’s rapid economicdevelopment has beenaccompanied by chronicenvironmental degradationand worsening pollution –which now poses a seriousthreat to human health andsocial stability, according toofficials. As China’s leaderswork to change that growthmodel, cities are at the fore-front of their efforts.

“We should not follow thehigh-intensity model ofwestern cities,” says HanWenke, director of theEnergy Research Instituteunder China’s economicplanning agency, referringmainly to energy consump-tion. “The faster we urban-ise, the faster we consume. . . We have to take the con-straints of energy and

resources into account.”Urban migration is drasti-cally changing patterns ofconsumption and behav-iour: China’s city dwellersuse three times as muchelectricity as rural resi-dents, eat 10 times as muchsugar, and require vastlymore infrastructure as theygo about their daily lives.One official estimates thatfor every person who movesto a city, the governmentspends Rmb100,000 ($16,000)to build additional roads,bridges, utilities and otherpublic goods – which allrequire energy-intensiveinputs like steel or cement.

Policy makers have triedto guide cities toward amore sustainable pathusing policies that rangefrom carbon emission tar-gets and incentives forlocalised solar power, tocaps on energy use andhuge investments in publictransportation. Last monthHu Jintao, then China’s topleader, pledged to launch a“revolution in energy pro-duction and consumption,”and said that urbanisationmust be balanced with “eco-logical security”.

China’s biggest cities, likeBeijing and Shanghai, havetaken the lead in many ofthese efforts. To reduce airpollution and carbon emis-sions, Beijing (pop. 20m) isphasing out coal-firedpower plants within thecity’s urban core, replacingthem with cleaner-burningnatural gas power plants.

In central and westernChina, taxi fleets run onnatural gas instead of petrolbecause it is cheaper andcleaner. And many munici-palities are sponsoring

“eco-cities” built from theground up and based onconservation principles.

Despite the myriad effortsto make cities greener, pro-gress has been slow becauseChina’s broader economicand political structure stillrewards local officials forhigh investment and fastgrowth, rather than for sus-tainability. The economicboom of the past three dec-ades was fuelled by highinvestment in fixed assets,a model that birthed sprawl-ing, inefficient cities full ofbuildings built so poorlythey barely last for 20 years.

“Think about whoChina’s cities are built for,”muses a municipal officialbased in Fujian province.“They aren’t built forpeople. They are built aspolitical accomplishments.”

One result of this is thegiant street grids that makeall Chinese cities feel eerilysimilar – and make them

unwalkable for pedestrians.Chinese officials point out

that another challenge iswho will pay for policiesthat lessen a city’s environ-mental impact. Sewagetreatment, efficient rubbishdisposal, and clean energysources can all be costly.“Someone might build anew sewage plant to meetregulatory requirements,but then they might shut itdown when the bosses arenot around to save on costsand energy,” says XiaGuang, head of policyresearch at the Ministry ofEnvironmental Protection.

For this reason, achievingurban sustainability – andsucceeding in broader envi-ronmental efforts – dependon transforming the eco-nomic growth model andrewarding officials for sus-tainability as well as GDPgrowth, according to offi-cials and academics.

Henry M Paulson, foun-der of the Paulson Instituteand former US TreasurySecretary, says buildingsustainable cities in Chinawill require a “new modelof municipal finance” andthat the urbanisation proc-ess can only be managedwell if it is accompanied byeconomic reform.

“There needs to be aneffort to build sound, long-term economic frameworksthat really recognise thescarcity of our naturalresources,” he says.

Whether in the US or inChina, what is needed, hesays, is “a growth modelthat lets us increase pros-perity without exhaustingour natural resources orundermining the environ-ment”.

Battle to balance urbanisationwith ecological sustainabilityEnvironment

Cities are a key frontin the fight againstpollution, writesLeslie Hook

On FT.com »

Military machineLearning to usenew equipmentChina is expandingthe deploymentof its hardware,says Kathrin Hille

Quality of lifeDiscovering thejoys of free timeSpending on leisureand tourism ison the rise, reportsPatti Waldmeir

Labour shortagesDouble-digitwage increasesProductivity mustrise or factoriesrisk closing, writesRahul Jacob

Cities need energy-intensiveinputs such as steel

2 ★ FINANCIAL TIMES WEDNESDAY DECEMBER 12 2012

China

China’s biggest bankingproblem has long been alack of risk taking. Bankershave lavished loans onstate-owned enterprises,believing the governmentwill back them up, andshied away from the hurly-burly of the private sector.

But a tipping point ofsorts has been reached thisyear, showing risk is on therise in the Chinese bankingsector – for the better andfor the worse.

Since July, for the firsttime ever on a consistentbasis, non-bank institutionshave been as big a source offinancing as banks them-selves. That has ensuredthat credit growth in Chinahas remained strong eventhough the government hasput a cap on lending bybanks. The ratio of totalcredit-to-gross domesticproduct in China has risenthis year to more than 190per cent from roughly 175per cent in 2010 and 2011.

“This development is adouble-edged sword,” saysSimon Ho, a banking ana-lyst with Citi.

“Ample credit growthmeans a non-performingloan shock is unlikely[because companies canaccess financing], but therapid growth of credit [iscoming] through less regu-lated and opaque products.”

The biggest alternativeprovider of credit has beentrust companies – a corpo-rate structure which com-bines aspects of privateequity firms and hedgefunds. Trust company lend-ing rose by more than40 per cent this year, com-pared with just a 15 percent increase in formalbank lending.

The corporate bond mar-ket has also grown veryquickly, emerging asanother key alternativesource of financing. It ispossible to put a positivegloss on this – it heralds animportant change from thetraditional pattern of aboutthree-quarters of China’sfinancing coming throughthe bank sector.

“The booming bond mar-ket reflects the govern-ment’s promotion of directfinancing, which shouldreduce the reliance on thebanking system, diversifyrisks and improve theefficiency of resource allo-cation,” Jian Chang, aneconomist with Barclays,wrote in a recent note.

But the InternationalMonetary Fund said in itsglobal financial stabilityreport in October that thecorporate bond market inChina bore some of thesame characteristics as themurkier shadow banks:high returns and artificiallysuppressed default risk.

“Underpinning demand isa record of zero bonddefaults matched byremarkably high credit rat-ings,” the IMF wrote. Itnoted that 98 per cent ofrate bonds are AA orhigher.

The Chinese onshore cor-porate bond market has yetto experience a default,with local government bail-outs protecting companiessuch as LDK Solar whichwere on the brink of trou-ble. The shadow bankingsector, though growingquickly in China, is stillmuch smaller than its

equivalent in developedeconomies in the run-up tothe global financial crisis.But exposure to the shadowassets in China is verybroad because banks them-selves have become themain channel for theirdistribution.

Banks have been fightingfor customers by marketingwhat are known as wealthmanagement products –deposit-like instrumentsthat offer yields about150 basis points higherthan ordinary savingsaccounts. These returns areachieved in large part bydirecting the customers’funds into the shadowbanking sector, though withonly the most minimal ofdisclosures.

A reminder of the risksinherent in such activitycame in early Decemberwhen Hua Xia bank, one ofthe country’s most aggres-sive distributors of wealthmanagement products,blamed an employee forissuing a product thatmight not be able to repayinvestors.

Hua Xia said the productswere backed by assets froma pawn shop and a car salescompany in the poor cen-tral province of Henan.

That, however, is an iso-lated case and regulatorssay they are confident thatthey have a handle on therisks. “Unlike in some for-eign countries, most finan-cial activities by non-bankfinancial institutions inChina come under supervi-sion,” Zhou Xiaochuan, cen-tral bank governor, said inNovember.

But with the shadowbanking sector expandingso quickly in China, regula-tors have their work cut outin staying on top of it.

When regulators took steps,for instance, to slow thegrowth of trust companiesin recent months, financingflowed instead to securitiesbrokerages.

It turned out that securi-ties brokerages, stung by aweak stock market, wereonly too eager to follow thetrust model by packaginghigh-yielding loans intoinvestment products. As aresult, assets under man-agement in the securitiessector have more than tri-pled from Rmb282bn at thestart of the year toRmb930bn at the end of thethird quarter.

The fact banks them-selves are the main inter-mediary between investorsand non-bank institutionsraises the question of justhow many of the shadowproducts might eventuallywend their way back on tobank balance sheets.

“Wealth managementproducts and trusts sold viabanks may be perceived ashaving little more risk thanbank deposits as it is gener-ally believed that every-thing will be taken care ofby banks and/or the govern-ment,” Wang Tao, an econo-mist with UBS, wrote in arecent note. “In the end,social pressure may indeedforce banks to shoulder therisk and any losses.”

So, while credit flows inChina are more diversifiedthan in the past, the buck isstill likely to stop with thebanks.

Risk increasesin alternativefinance sectorLoan financing

A tipping point hasbeen reached, saysSimon Rabinovitch

‘In the end, socialpressure may forcebanks to shoulderany losses’

Only in China could growthof nearly 7 per cent a yearbe considered a collapse inthe market. But when itcomes to Chinese passengercar sales – which rose 6.9per cent in the year to Octo-ber – growth levels thatwould be welcome else-where are seen as disap-pointing.

With foreign automakersdepending more and moreon Asian sales to bolsterlong-term weakness in theirhome markets, anythingshort of stratosphericgrowth from China wouldprobably qualify asbad news. In the past fiveyears, China contributedone-third of total globalgrowth in vehicle sales,says Bill Russo, formerhead of Chrysler in Chinaand an advisor to Booz &

Co, the global consultancy.But the new slower

growth model is not goingaway any time soon, automarket experts say.

China’s 46 per centgrowth in 2009 and 32 percent in 2010 catapulted themainland into position asthe world’s largest automo-bile market, several yearsahead of expectations.

By last year, however,passenger car sales roseonly 5.2 per cent, while thepace of car sales so far thisyear has quickened onlyslightly to 6.9 per cent.China still sold a total of18.5m vehicles last year,compared to 12.8m lightvehicles sold in the US.

Mr Russo forecasts thatpassenger car annual salesgrowth will fall from the 25per cent average of the dec-ade before 2010, to 5 to 8 percent for the coming decade.

Like the Beijing govern-ment, which thinks less fre-netic growth is good for theChinese economy overall,most auto executives wel-come lower growth – andstress there are still plentyof Chinese consumers eagerto buy their first car.

With more than 150 cities

with a population of at least1m, and the bulk of theChinese population livingin cities outside developedcoastal areas, auto marketexperts expect at leastsingle digit growth for theforeseeable future. Thequestion is not, who will bethe buyers, but who will bethe sellers?

Homegrown automakershave spent three decadestrying (with Beijing’s help)to become true global rivals

to the US, European, Japa-nese and even Korean car-makers that dominate theChinese market.

However, in recent years,domestic automakers havelost, rather than gained,market share in China andnow hold less than 30 percent of the market. Previ-ously, they dominated thehypercompetitive, slim-margin low end of the mar-ket but western automakershave even broken into thatstronghold, with attractivenew small models.

Japanese carmakers haverecently lost market sharebecause of anti-Japan dem-onstrations in severalChinese cities in September,sparked by a territorial dis-pute between Beijing andTokyo which appears farfrom resolution.

The main beneficiaries ofJapan’s decline appear to bewestern and Korean auto-makers, whose products areseen as better substitutesbecause of their reputationfor higher quality.

“It will take a long timeto establish the consumerbelief that Japanese carsare once again fashionable,”says Mr Russo.

“I don’t think it’s a per-manent issue,” he says, butnotes that a recovery willdepend on resolution of theunderlying political disputeand will take years ratherthan months.

While foreigners carve upthe market territory cededby the Japanese, domesticautomakers are still viewedas competing mainly onprice, despite their recentefforts to move upmarket ina hurry.

Lin Huaibin of IHS Auto-motive in Shanghai saysthe market’s relatively poorperception of Chinesebrands is no longer merited.

“A lot of people are pessi-mistic about Chinese OEMs[original equipment manu-facturers] but the quality ofChinese OEMs is improvingand the gap is shrinkingwith foreign brands,” hetold a recent auto industryconference in Shanghai.

“But they have a poorbrand image and it willtake time for consumers tounderstand that qualityimprovement,” he notes.

Meanwhile, as mainlandcar sales growth slows andcompetition with foreignautomakers intensifies,

domestic carmakers areturning to overseas marketsto take up the slack.

They have responded bycranking out exports tosome of the world’s lesssought-after markets – suchas Iran and Iraq – withyear--to-date exports up27 per cent and Chinaexpected to sell 1m vehiclesoverseas this year.

But to become globalplayers in the auto industry– as Beijing has longwanted them to be –China’s carmakers muststill find a way to crack thelargest car market in theworld, right on their door-step.

Auto industry executivesestimate domestic car-makers will not have evenhalf of that market in thenear future. But, thenagain, no one would havepredicted five years agothat China would soquickly top the world inauto sales. The Chinesemarket has confounded thebest forecasters in recentyears, and this time may beno different.

With additional reporting byYan Zhang

Carmakers compete in a crowded market

China took one step forwardover the past year inrebalancing its economytowards a more sustainablegrowth model. But, in the

past few months it has also taken onestep back.

Building on a trend that began lastyear, consumption was a biggercontributor than investment togrowth in the first three quarters ofthis year, a crucial shift for aneconomy which has long beenexcessively reliant on investment.

Nevertheless, faced with a deepen-ing slowdown, the Chinese govern-ment has undone some of thatprogress by reaching for afamiliar solution: it has cranked upspending, especially on infrastructureprojects.

As a result, the Chinese economy ispoised to end 2012 on a relativelystrong note, but data are likely toshow that it was thanks to invest-ment, not consumption.

A surge in spending on railways hasbeen emblematic of this. Investmentin rail projects increased 82 per centyear on year in October, up from a37 per cent pace in August.

Such backsliding has been seenbefore. As early as 2007 Wen Jiabao,the departing premier, pronouncedthat China’s economy was danger-ously out of kilter: growth hadbecome “unsteady, unbalanced, unco-ordinated and unsustainable”. Butwhen the global financial crisiserupted in late 2008, China unleasheda Rmb4tn ($585bn) stimulus packageto avoid falling into a recession.

That pushed investment up tonearly 50 per cent of gross domestic

product in 2010, a level never seenbefore in any leading economy inpeacetime. The other side of thecoin is that personal consumptionaccounts for just about 35 per cent ofGDP, down from 46 per cent in the1990s and far below the norm in otherfast-growing countries.

A recent working paper by theInternational Monetary Fund assessedthe extent of China’s over-investment.Its conclusion was that investment inChina had been running at a levelabout 10 per cent higher than wouldbe considered optimal for an economyat its stage of development.

The deviation is “larger and [more]persistent than the implied over-investment in other Asian economiesleading up to the Asian crisis [of1997-98] or in Japan in 1980 before theonset of its lost decade,” the authorsof the IMF paper wrote.

Based on that comparison alone, itwould seem that a miserable fateawaits the Chinese economy. Thereare, however, two crucial distinctionsbetween China and its previouslyover-invested Asian peers.

The first is that the funding forChina’s investment has been almostentirely domestic in origin. Thismeans that the country should besafe from the sort of external debtcrisis that plagued South Korea andThailand.

The second is that, despite therecent backsliding, the governmentappears to be acutely aware of thedangers of over-investment and hasstarted to take a series of steps tochange the underpinnings of growth.

It has made progress in building awelfare state, a necessary backstop

that will allow people to spend moremoney. More than 430m Chinese arecovered by basic health insurance, upfrom just 40m a decade ago.

Cautiously, the government hasbegun to introduce interest rate dereg-ulation. As of June this year, commer-cial banks are able to set deposit rates10 per cent above benchmark rates.This seemingly small move is helpingpave the way to greater competitionfor funding among banks, raising thecost of capital for borrowers andhence discouraging investment.

The cause of rebalancing is beingfurthered by structural changes in theeconomy.

Most important of these is thepending decline of that part of thepopulation that is of working age.With the labour force already growingmore slowly, employers must competefor workers more than ever and wageshave been rising by about 10 per centa year – an important spur forconsumption.

Li Keqiang, who is all but guaran-teed to be appointed premier inMarch, has so far made many of theright noises about economic reform.

“If we do not do it, then we will notmake mistakes, but we will bear his-toric responsibility,” he said in aspeech in late November.

Ha Jiming, vice-chairman of theinvestment management division ofGoldman Sachs in China, believesthat, among other issues, Mr Li willconcentrate on making it easier forrural residents to settle in cities andwill also push for service industries tobe opened more widely to privateinvestors. But these ideas have allbeen talked about for a while and newpolicies are likely to be implementedonly slowly.

Mr Ha says: “Gradualism, instead ofcold turkey, is still the tone of futurereforms. This is manifested by theemphasis on the importance of intro-ducing pilot programmes when carry-ing out major reforms.”

These are all positive omens. But,as this year has shown, the shift inChina’s economic model is far frompreordained.

Officials were all too willing to putthe objective of rebalancing to oneside when confronted with the alter-native of a sharp growth slowdown.

Economy ison track butreform remainsin the sidings

Growth Beijing needs to rebalance policytowards consumption, says SimonRabinovitch

Welfare state:babies arevaccinateden masse at ahospital in Aksu

Reuters

Generational change

increasingly common causeof demonstrations and riots.

The rising consensusamong economists is thatthe export-oriented, invest-ment-led growth model thathas sustained China formore than three decades isrunning out of steam andmajor reforms are neededfor growth to continue.

“Ensuring the sustaina-bility of growth is an enor-mous challenge,” saysZhang Bin, an economicsresearcher at the ChineseAcademy of Social Sciences.

“The contribution of man-ufacturing to economic

Continued from Page 1 growth is already reachingits limits so we need to con-centrate on the develop-ment of core services in-stead.”

He says that one of thefirst priorities of the newgovernment will be to im-prove social services, a taskthat the Hu administrationattempted with varyingdegrees of success.

“The government is basi-cally absent from providingpublic goods and thelaws and regulations [thatgovern social services]are defective. The govern-ment needs to put farmore investment intothings like food safety,

science, education, healthand solving housing prob-lems; this is what we call alack of software.”

While the Hu administra-tion at least attempted toredress the paradox ofbeing a socialist nation thatstruggles to provide basicsocial services, in the morefundamental area of politi-cal reform they did noteven try to shake up thestatus quo.

In response to risingdemands for more transpar-ent government from anincreasingly wealthy andwell-informed public, theparty mostly respondedwith a combination of

heightened repression andshort-term policies to keepthe economy humming.

In recent years thedomestic security budget,which includes money forthings like police, secretpolice, courts and para-military troops, hasexceeded the official mili-tary budget. China spendsmore on repressing internalthreats than guardingagainst external enemies.

“In the next 10 years thebiggest crisis for the gov-ernment will be a crisis oflegitimacy,” says Wu Qiang,a politics professor at Tsing-hua University. “Can theparty introduce democracy

within itself or will it beoverthrown by an externalforce? That is the biggestquestion it faces.”

Some analysts and evensome government officialsbelieve Mr Xi has the desireand possibly the authorityto introduce sweeping polit-ical reforms in the comingyears, but so far there islittle solid evidence tosupport that theory.

Mr Xi’s inaugural speechfocused on the importanceof improving his subjects’lives with higher incomes,better social services andbetter living conditions, butthere was no mention ofgiving the people a greater

say in who governs themand how. In the briefaddress there was also nodirect mention of how MrXi intends to deal with therest of the world at a timewhen China appearsincreasingly assertive andeven threatening to manyof its neighbours.

He did repeatedly empha-

sise the “great revival ofthe Chinese nation” and theneed for China to “standmore firmly and powerfullyamong all nations”.

This kind of languageplays well to a populaceraised on a steady diet ofnationalism and lessons onhistorical “humiliations”inflicted on China by foreigninvaders. Many Chinese aca-demics, however, argue thatBeijing’s foreign policyapparatus is a mess andneeds an urgent overhaul.

“If we take the SouthChina Sea as an example,we can see that oil compa-nies, maritime surveillanceauthorities and even the

military are exerting influ-ence over China’s foreignpolicy there,” says ZhuFeng, a professor of interna-tional relations at PekingUniversity. “The biggestchallenge for China in thenext decade will be whetheror not it can co-ordinatethe many domestic interestgroups to come up witha more effective foreignpolicy.”

The world should hopeMr Xi and his team are upto navigating that journeyand carrying out the urgentpolitical, economic and for-eign policy reforms neededto address the bafflingarray of problems they face.

New leaders face tough challenges

‘The government isbasically absentfrom providingpublic goods’

Auto industry

Local manufacturersvie with global rivalsto gain traction onthe mainland, writesPatti Waldmeir

FINANCIAL TIMES WEDNESDAY DECEMBER 12 2012 ★ 3

4 ★ FINANCIAL TIMES WEDNESDAY DECEMBER 12 2012

China

It is a mark of how therelationship between Taiwanand China has strengthenedover the past few years thateven the former head ofTaiwan’s opposition party –which historically has beenhostile to the mainland andin favour of Taiwaneseindependence – recentlyvisited Beijing to meetofficials and academics.Since Taiwan’s President

Ma Ying-jeou took office in2008, Taiwan’s relationshipwith China has warmedsignificantly. The two havesigned nearly 20 trade andinvestment pacts, starteddirect flights betweenTaiwan and the mainlandand made Taipei the firstmarket outside Hong Kongable to clear renminbitransactions.But with those key

agreements sealed, the paceof change in the relationshipwill likely begin to slow,businesspeople and politicalanalysts say.Many of the regulations

that limited Chineseinvestment in Taiwan orimposed tariffs onTaiwanese goods shipped toChina have been loosenedor are under negotiation.Remaining restrictions, suchas limits on mainlandinvestment in Taiwanproperty, are seen as toocomplicated or politicallyfraught to change for now.Clarification of the status

of the political relationshipbetween Taipei and Beijingremains too controversial forTaiwan’s government toopen talks on, politicalanalysts say.“[Taiwan’s leaders] cannot

do a political deal unlessthey have a mandate fromthe people of Taiwan,” saysSteve Tsang, an expert inChinese and Taiwanesepolitics at the university ofNottingham.The question for many is

to what extent the improvedrelations and trade pactsalready signed will boostcross-strait investment.Many investors are hoping

mainland investment in thesmaller market will boost

Taiwan’s flagging economyand a stock market that hasunderperformed much ofthe region.The signs are positive. In

November, the largestinvestment yet by a Chinesecompany in a Taiwaneseone was unveiled, whenSanan Optoelectronicsannounced plans to buy an$81m stake in FormosaEpitaxy, an LED maker,although the deal awaitsregulatory approval.Overall investment from

China into Taiwan had risen309 per cent year on yearto $156.7m by October ofthis year. Most of that camefrom two Chinese banksthat opened branches inTaipei this summer.Yet analysts and

businesspeople forecast thatmainland Chineseinvestment in Taiwan will,for now, remain limited.Although Japanese

companies are increasinglyinterested in partnershipswith Taiwanese companiesto work on the mainland,the new cross-strait tradeagreements have yet tospark similar interest fromwestern companies, saysChristoph Nettesheim, headof Boston Consulting Groupin greater China.Mainland investors have

focused on a limited numberof sectors, particularlytechnology, where investorswant access to Taiwan’sintellectual property, saysJohn Chen, a Taipei-basedconsultant on cross-straitbusiness.Real estate is an area of

interest, although mainlandbuyers still face strict limitson purchasing property.Chinese developer Vantonehas a partnership with alocal group to build luxuryflats on a mountain northof Taipei, the first bigChinese-backed developmenton the island.Beyond that, Mr Chen

hears from prospectiveChinese investors that“Taiwan’s market is toosmall – China invests inAfrica or southeast Asia.”

Sarah Mishkin

Taiwan Cross-strait investment slowlypicks up as political relations improve

When the seven men whowill rule China for thenext 10 years presentedthemselves last month,six of them wore red

ties. Wang Qishan, the vice-premierwell known to foreign investors asone of China’s most capable economicpolicymakers, came in a blue one.

Mr Wang will need to separate him-self from the rest of the political eliteto some extent if he is to succeed inhis most challenging task yet: battlingcorruption.

Instead of putting him in charge ofthe economy, the Communist partymade him head of the centraldiscipline inspection commission, theparty organ that investigates cadressuspected of corruption.

Almost everyone in China agreesthat corruption is endemic. TheCommunist party leadership has beenwarning publicly for many years thatcorruption is the single largest threatto its monopoly on power. When HuJintao, outgoing party chief andpresident, presented his work reportat the party’s national congress lastmonth, he warned again that corrup-tion could see the party, or even thenation, perish.

Yet the leadership has been unableto stop the rot. An account of theproblem and the party’s counter-measures by Lin Zhe, a professor atthe central party school, the party’smain institution for training cadres,highlights the high number of cases,large amounts of money and highdegree of organisation and sophistica-tion that corrupt practices involve.

This is despite untiring efforts tobetter supervise officials and blocktheir chances of siphoning off fundsand building networks. Over the pasthalf decade, China’s criminal code hasbeen overhauled and the party’s inter-nal rules updated to outlaw methodsof self-enrichment, such as receivingsalaries for roles that involve no workor having family members amassriches using official privilege.

But, although thousands of officialsare found guilty of corruption everyyear, the constant tweaks to the ruleshave not stopped scores more fromcontinuing the same practices. Thereason, which even officials who donot support the idea of western-styleseparation of powers acknowledge, isthat the party itself is above the law.

“We have fine laws but they areapplied selectively,” says a retired offi-cial who headed the anti-corruptionunit in a regional prosecutor’s office.

“When we had a case, we wouldalways have to ask the party to decidewhether to go ahead with an indict-ment or even an investigation,” hesays. “If you don’t hear back, you hadbetter back off.”

Another problem is that the anti-cor-ruption watchdogs are easily compro-mised. Since 2004, the party has beenfighting corruption in the disciplineinspection units on all administrativelevels. To ensure officials are not leni-ent towards people they see as theirown, the unit’s cadres must serve out-side their home provinces. But theproblem persists, says Prof Lin.

One reason for this is that supervi-sion is patchy at best. China has long

required officials at all levels to reporttheir income. But Chinese scholarsinvolved in training cadres say offi-cials lack even the most basic conceptof what constitutes illegal income,with a large majority regularly boost-ing their meagre official salaries withfees from “red envelopes” handed outon occasions such as ribbon-cuttingsat the opening of a road or a factory.

Moreover, the forms the cadres fillin every year stating their salary arenormally just archived. “They are notaudited nor published, but those areexactly the steps that are necessary,”says Prof Lin.

For seven years in a row, HanDeyun, a Chongqing-based lawyer anddelegate to the national people’s con-gress, has proposed draft legislation atthe annual session of China’s rubberstamp parliament requiring officialsto declare publicly their assets. Butthe campaign has hit a brick wall assuch rules would put the most seniorleaders in a bind.

Village or town officials are fre-quently investigated for alleged cor-ruption when users of China’s vibrant

social media expose them for owningwatches, cars or houses worth farmore than their legal salary could payfor. Every time that happens, theparty’s propaganda machine assertssuch misbehaviour is being dealt with“according to law”.

Such assurances are often met withsarcasm, as the public increasinglyunderstands how officials transfertheir wealth out of the country andhow senior leaders’ families haveamassed riches.

“Whereas corruption in Japan andSouth Korea was ‘structural’ andinstitutionalised, in China it wasanarchic and predatory,” AndrewWedeman, an expert on Chinese cor-ruption, writes in his new book, Dou-ble Paradox.

“Corrupt officials were not, itseemed to me, scraping off a share ofthe gains companies earned from thegovernment’s pro-growth policies; inmost cases they were simply preyingon companies, stealing a share oftheir profits in return for not harmingthem or, in many other cases, stealingfrom the state itself.”

Wang takesresponsibilityfor stopping rotin public officeCorruptionThe vice-premier’s brief is to rootout increasingly sophisticated forms of illegalpayments, reportsKathrinHille

Battle lines:people in thefishing villageof Wukanprotestedagainst officialcorruption andillegal land grabsAFP

The ancient celestial capitalof Beijing is the embodi-ment of the traditionalChinese world-view.

In the middle of Beijinglies the Forbidden City,from where the emperorruled “tianxia” or “allunder heaven”. Here wasthe centre of the world, theChinese empire and the var-ious Asian vassal and tribu-tary states and, beyond, thewilds where the barbarianslived.

The city today is asprawling gridlocked trafficjam of concentric ring roadsthat ripple out from theForbidden City and the vastTiananmen Square, wherethe remains of former dicta-tor Mao Zedong lie in state.His portrait hangs on theTiananmen Gate.

If you have been to seethe mummies of Lenin orHo Chi Minh in their crys-tal sarcophagi then there isprobably not much point ingoing to see Mao – the fig-ure in the glass case isalmost certainly made ofwax and opening hours arenot very convenient.

On the other hand, theForbidden City is essentialfor all visitors to Beijing.You can enter from eitherthe south, next to Tianan-men Square and head northor enter from the north gatenext to Jingshan Park andwalk south. The parks and

lakes to the north of theForbidden City are stun-ning, for those who like toexplore and see how localsspend their spare time.

The national museum onthe east edge of TiananmenSquare is worth a visit forthe “Road of Rejuvenation”– a permanent exhibitionthat glosses over anythingnegative that occurredunder Communist partyrule and focuses on the“national humiliation”imposed on China byforeign nations, particularlythe UK and Japan.

A visit to this exhibitionprovides great insights intohow the party bends historyin order to build national-ism in modern China.

At the south end ofTiananmen Square stands atacky Disneyesque replicaof the once-vibrant ancientneighbourhood of Qianmenthat is not really worth avisit. But tucked around thecorner and upstairs is Capi-tal M, an excellent place toget delicious western foodand drink in a wonderfulatmosphere with a viewnorth out over the square.

For those who feel likeexploring an area without

hordes of tourists, theformer legation quarter forforeign diplomatic missionslies to the east of Tianan-men Square. These leafystreets of old colonial archi-tecture are Beijing’s answerto Shanghai’s French Con-cession and are filled withastonishing relics and rem-nants of European incur-sions into 19th and 20thcentury China.

The compound that wasonce the US legation hasbeen renovated and trans-formed into a cluster of finedining establishments andis worth a visit for dinneror brunch.

Unfortunately, most ofthe other legations are usedby secretive governmentagencies that do not allowforeigners to enter.

Beijing is filled withexcellent restaurants boast-ing cuisine from everycorner of the empire, butvisitors who are short ontime and lack the adventur-ous spirit should head toMade In China at the GrandHyatt just a couple ofblocks east from Tianan-men. This famous establish-ment serves deliciousPeking duck and beggar’s

chicken, which need to beordered in advance. Mealscan comprise dishes fromall over China, finished offwith ice cream flavouredwith Chinese grain-liquoror black sesame.

No visit to Beijing is com-plete without a visit to theGreat Wall and every hotelin town can arrange a tripto one of the various accesspoints. The Mutianyulocation has smaller crowdsand is more picturesquethan other closer spots andshould still be less than atwo-hour drive (includinglong traffic delays) fromcentral Beijing.

When it comes to night-life, Beijing is full ofoptions, but again the atro-cious traffic, particularly onweekend evenings, oftenlimits what you can do.

The Nanluoguxiang andDrum and Bell Tower areasare filled with interestinglittle watering holes, includ-ing the Great Leap brewerywhich serves its own home-brewed beer. Try the oneinfused with honey andSichuan peppercorns.

The Sanlitun street areais a perennial favourite forits bars and nearby there isa huge selection of thump-ing nightclubs around theWorker’s Stadium complex.

One last piece of advicefor all visitors to the celes-tial capital: politely butfirmly tell anyone whocomes up to you and saysthey want to practice theirEnglish or show you anexhibition of their art ordrink some tea with you ina nearby teahouse that youare not interested, unlessyou want to get caught in atraditional Beijing scam.

Colonial architecture, exhibitionsand cuisine woo the inquisitiveBeijing

Celestial capitaloffers an array ofcultural attractions,says Jamil Anderlini

Jamil AnderliniBeijing Bureau Chief

Kathrin HilleBeijing Correspondent

Patti WaldmeirShanghai Correspondent

Simon RabinovitchBeijing Correspondent

Leslie HookBeijing Correspondent

Rahul JacobSouth China Correspondent

Sarah MishkinHong Kong Correspondent

Aban ContractorCommissioning Editor

Steve BirdDesigner

Andy MearsPicture Editor

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Towering presence: ‘Road of Rejuvenation’ Photoshot