William Pesek

China was not amused, particularly with Bush urging it to welcome back to Tibet the Nobel Prize winner who’s lived in exile since 1959. Officials in Beijing said US support for what they see as the Dalai Lama’s “splittist" mission could have “an extremely serious impact" on US-China relations. Former US secretary of state Henry Kissinger told television host Charlie Rose that the timing was a “terrible idea".

Then things turned downright weird. Google Inc. was among the search engines last week being blocked in China and redirected to Chinese-owned Baidu. Observers couldn’t help but connect the dots between the odd cyber activity, which also affected Yahoo and Microsoft, and events in Washington. “Some have accused Baidu of hijacking the traffic, but we think it’s likely that China is upset with the US over the award it granted to the Dalai Lama and is in retaliation for hurting US-based search engine," wrote analysts Danny Sullivan and Barry Schwartz at Search Engine Roundtable.

While the full story isn’t yet known, all this says more than meets the eye about the daunting challenges facing China and why investors shouldn’t assume officials in Beijing will keep the economy from going off the rails. “China is great at coming up with slogans—lots of slogans," Michael Witt, a professor at business school Instead, said at an 19 October conference in Singapore. “It’s not as good at explaining how it plans to implement its economic ideas." Hu, for example, is talking more and more about promoting a “harmonious society" and achieving it with something called a “scientific outlook on development." To China watchers, that’s a lofty way of saying narrow the gap between rich and poor in a way that doesn’t worsen the nation’s environmental challenge. Hu has offered few specifics on how to do it—just slogans.

The main headline coming out of Beijing is how Hu solidified his power and made way for younger leaders. Yet, so far, Hu’s been anything but a reformer—he’s been a status-quo-er. His plan seems to be to talk about change, while maintaining the status quos on China’s currency, export-led growth, insatiable demand for resources and dual bubbles in stocks and pollution that are inflating further by the day. Likewise, Hu talks about the need to reduce corruption, a vital step towards spreading the benefits of 11.9% growth. Yet, other than holding up the occasional scapegoat, Hu’s made no significant progress towards making the Communist Party transparent or accountable.

If only Hu’s vision for the economy had the clarity of China’s stance on the Dalai Lama or the Internet. The latter issue is not an inconsequential one for an economy that’s hoping to foster greater innovation and thriving service industries. Is it really possible for a country that censors Google and Wikipedia to churn out world-class entrepreneurs?

Perhaps Hu really will use his next five years to spread the benefits of growth. Thus far, though, his policies have seen to it that China won’t reach that goal anytime soon. By relying on foreign investment as a primary growth engine, China is championing industries with meagre job growth and low wages. That’s delaying the creation of a domestic economy.

For starters, Hu should adopt the phrase “social safety net" in place of meaningless platitudes about harmonious growth. The reason Chinese save so aggressively is the lack of a system that provides a sense of stability decades from now. Spending more on education, health care and public pension systems would do more to get households consuming than slogans. Reviewing the currency is another priority. That’s not because of pressure from US treasury secretary Henry Paulson. Keeping the yuan low means lower interest rates than China requires. It results in the diplomatic fiasco caused by China’s massive trade surplus and unproductive $1.4 trillion (Rs55.72 trillion) of currency reserves. It also feeds the focus on export industries and keeps investment from flowing into the kinds of services industries that would raise living standards over time.

Chinese leaders should remember Deng Xiaoping’s edict that economic reform will not work if political reform doesn’t keep pace. A big increase in openness and accountability—an independent judiciary, an autonomous central bank, a freer press, watchdog groups—would help stabilize the economy. The risk is that China sticks with the growth-above-all strategy. If you look at Hu’s views, he seems to expect the economy to grow even faster. He says China wants to boost per capital gross domestic product fourfold by 2020, a period during which the population could grow by between 100 million and 200 million. Hu seems to be betting on increased output. Amid so many risks and high stakes, slogans just won’t do.

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