<div>It’s not always that a central bank purposely allows a country’s banking system to wretch by squeezing liquidity that spreads panic in financial markets and makes investors very nervous. The People’s Bank of China apparently did something like that last month to send a signal to erring local banks: get real, discipline yourself, and check those bad loans, control profligacy.<br /><br />Soon after, as the Communist Party of China marked its 92nd anniversary, Chinese President Xi Jinping sent out another message to party cadres long used to being judged on their ability to drive economic growth. He told them that it was just fine to look at doing something else that was more important in the long term than merely focus on boosting the GDP.<br /><br />These are both in many ways strong messages from China’s political leadership that is now battling an economic slowdown. On one hand, it shows its resolve to address some of the key structural deformities that have started hurting the world’s second-biggest economy. On the other, it’s all politics and the Communist Party needs to look at different options to address the expectations of a new generation that is beginning to question and protest.<br /><br />Analysts have been busy paring the economic growth for China for some months now, and there is a strong chance it would come in below the government’s target of 7.5 per cent this year. That won’t be surprising because the overall economy has slowed and jobs have gone as China’s traditional export markets are yet to recover fully from the Lehman flu.<br /><br />Plus, bad loans and undisciplined bank lending are scaring the government for good reasons. As the world economy tottered after the Lehman collapse in 2008, Chinese banks went on a lending spree to ensure that the domestic economy continued to grow. All this was, of course, done with the government’s knowledge. Now the chicken is coming back home to roost, raising fears over the possible puncturing of asset bubbles created by availability of easy money. The worry is genuine, as a slowdown coupled with a sharp decline in asset prices could create more bad debts.<br /><br />A combination of a wobbly economy, job losses, high-profile corruption in the government and environmental problems that are impacting day-to-day lives and businesses is too deadly to handle. The party – with 85 million members -- realises that economic development alone can’t continue to provide it the legitimacy it requires to remain in control.<br /><br />That was evident in a commentary by the official Xinhua news agency earlier this month. It said that the “new Chinese leadership has warned that the biggest threat to the Party involves alienating itself from the masses, as a slew of Party members and officials are not caring about people’s well-being.”<br /><br />This follows Xi’s earlier statement that winning or losing public support was an issue that concerned the party’s very survival. Indeed, the shifting social and economic sands in China today mean the party needs to quickly start appreciating people’s aspirations and become accountable for its actions. It’s, however, not easy for party officials to make that remarkable U-turn easily.<br /><br />A clean up also means that the focus needs to shift slightly away from the decades-old mantra of economic growth by any means. The obsession with GDP growth has to be tempered to manage environmental pollution, wastage and a growing divide between the rich and poor – an explosive social concoction that will hurt the party if it explodes.<br /><br />There is also a realisation that corruption remains one the “hardest nuts to crack,” as the Xinhua commentary said, adding that undesirable work styles such as formalism, bureacratism, hedonism and extravagance were alienating the Party from the people. The view seems to be, at least on the surface, that the system has become too rotten for comfort and, therefore, needs to be shaken up hard.<br /><br />For China’s government and its people it is now a choice between slower economic growth and much-needed reforms. After decades of high-octane growth, it is now time to step back and see what can be done to make it healthier in the long run and ensure the party and its control is not impacted.<br /><br />Pushed to the wall, the Chinese government wants to turn the crisis into an opportunity reform, which is a noble thought. The big question is can the 85 million party cadres continue to manage the fate of the world’s most populated country? Corruption, according to Xinhua, might be one the hardest huts to crack, but there are several other nuts around that need to be cracked too for the pudding to become a little more edible than what it is now. Xi has time to take them up one at a time.<br /><br />(<em>The columnist, a former newspaper editor, is President, Public Affairs, Genesis Burson-Marsteller and co-founder of Public Affairs Forum of India. He has a keen interest in China and Southeast Asia. Views are personal</em>)</div>
