Five political risks to watch in China

on December 15 2009 1:32 AM

BEIJING, Dec 15 (Reuters) - China has so far weathered the global economic downturn with its growth rate staying robust and no sign the government faces any major challenge to its rule.

 Following is a summary of key China risks to watch:

* TRADE AND CURRENCY DISPUTES

Simmering disputes with the United States, the European Union and other economies over trade imbalances and the level of the yuan have the potential of escalating into more serious confrontations that could unsettle investors and capital markets. But most analysts believe that Beijing, Washington and Europe have too much to lose to risk a major escalation of these disputes. China has signalled that ultimately it wants a global financial order less dependent on the U.S. dollar. That remains a distant prospect and China is likely to maintain huge holdings of U.S. Treasury debt for a long time. Currency markets have shown acute sensitivity to any signs, however mild or ill-founded, that China is looking to reduce its holdings. [ID:nN14510480]

Key issues to watch:

-- The rhetoric on trade from Washington and Beijing. Both sides want to avoid any serious economic dispute but also want to protect their domestic industry and maintain popular support at home. Signs that positions are hardening, that the U.S. Congress is upping pressure that could shift policy, or that tit-for-tat measures could spiral out of hand, would hurt markets.

-- Hints of a change in China's currency policy. U.S. President Barack Obama made little headway in his efforts to press for a stronger yuan in his visit last month, and EU calls were also rebuffed. And although the central bank has tweaked its description of how it manages the currency, market expectations for yuan appreciation remain muted. Most expect China to keep the currency on a tight rein at least until mid-2010 to cement economic recovery.

* SECURING STRATEGIC SUPPLIES

China has been scouring the globe for energy and commodities to feed its economic growth, and has sought to secure strategic long-term supply deals. Its resource needs have major long-term implications for commodity and energy prices. And across the world, China is not just buying raw materials but is seeking to invest in countries and companies that produce them. This has transformed China's global economic and political role -- and many other nations are getting worried. [ID:nPEK46626]

Key issues to watch:

-- Reaction to Chinese foreign investment. The U.S. decision to block CNOOC's takeover of Unocal on national security concerns, and the acrimonious aftermath of the collapse of Rio Tinto's deal with Chinalco, show how political factors may undermine China's economic aspirations. Markets will be watching to see if more major deals are blocked -- and how China responds.

-- Attitudes to China in developing world. Chinese investment has given a boost to many developing economies, but there are also signs of a backlash emerging in some countries, fearful for their own industries and export markets.

* GOVERNMENT STABILITY

China's government has so far maintained general authority and control, despite predictions that the global crisis could spark widespread unrest among laid-off workers. Outbreaks of unrest have remained brief and localised, and recent economic data point to robust growth for the rest of the year and into next year. But with China's ruling Communist Party and global markets treating political stability as a crucial issue, even limited challenges to the Party's control could shake investor sentiment. A longer-term worry could be that the recent rapid economic growth cannot be sustained, as a burst of government-encouraged credit shrinks, leading to a rise in joblessness and investor disquiet, and sapping government spending-power and ability to cushion these problems. Ethnic tensions in Tibet and Xinjiang have distracted the central government and drawn international concern, but not seriously threatened national stability. Calls from some activists and intellectuals for greater openness and democracy have so far failed to gain much popular traction.

Key issues to watch:

-- Emergence of any regional- or national-level protest movements. So far, protests in China have been tended to be localised and directed at local officials, rather than challenging the central government. Given China's strict controls, it is also very difficult for any organised movement to emerge beyond the local level.

* THE ENVIRONMENT

China is central to efforts to win agreement on fighting climate change in Copenhagen this month. Beijing has pledged to cut carbon intensity over the decade to 2020, but also says economic development must come first and developed nations should bear most of the responsibility for reducing global emissions. China's rapid growth is also causing a host of other environmental problems, and citizens have become increasingly vocal about health problems caused by pollution.

Key issues to watch:

-- China's position on emissions. Markets will watch if China can agree a long-term emissions policy without stifling growth, or whether the Copenhangen meeting ends in acrimony without agreement. [nGEE5AP0OX] -- Investors will also be looking for opportunities that arise from growing investment and government spending in clean and renewable energy. -- Increasing environmental activism and stricter enforcement of standards could force some industrial projects to be halted.

* CORRUPTION, ACCOUNTABILITY AND COMPANY BEHAVIOUR

Corruption is an issue both for foreign investors in China and for national stability -- it has the potential to become a focus for social unrest if it is not adequately tackled. As well, with business and politics so closely intertwined in China, commercial negotiations and disputes can become embroiled in wider political and diplomatic friction. The claims of commercial spying by Rio Tinto have underscored these concerns.

Key issues to watch:

-- Corruption estimates. Investors will be watching to see whether China rises or falls in corruption perception rankings. -- Investors will closely watch China's handling of the case involving four Rio Tinto staff, and also more general signs of how the government intends to handle the boundary between business deals and politics.

(Compiled by Andrew Marshall and Chris Buckley)

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