By Michael Baxter

This column has said some pretty positive stuff about China's Premier Wen Jiabao in the past.

Mr Wen is a smart guy. He was once seen at the annual conference of the world's leaders at Davos, carrying a worn, and obviously much loved, copy of Adam Smith's Wealth of Nations.

He has repeatedly warned of bubbles forming in China’s economy, of the need to get consumer spending up and imports up, and for China to become less reliant on export led growth.

He has warned of the dangers of a property bubble, and even dropped hints about China's currency, the yuan, being allowing to trade freely — music to the ears of US politicians (not that they want their ears to receive music, when there are cheap political points to be had by slagging off China at every opportunity).

It is just that reports have been circulating about Mr Wen's fortune. He is a rich man, and so it appears is his family, and their wealth appears to have been acquired during the last ten years while he occupied a powerful position in China.

How did he acquire such wealth?

While Mr Web is important, he is not China's most powerful man; that description belongs to Hu Jintao, the President.
As you probably know, China is about see a once in ten years’ transfer of power.

Messrs Wen and Hu will be off, eating grass, gardening, or perhaps pulling strings in the background.

This week, Mr Hu gave his state of the nation speech — an annual event, which on the eve of the power transfer took on more meaning than usual.

His speech was notable for two reasons. Chinese media coverage may have been notable for another reason.

Mr Hu talked about the target of seeing average wages in China double over the next ten years. If this can be achieved, it will be good news indeed. Good news for China’s workers of course, good news for western companies — including the likes of Tesco and Marks and Spencer — and good news for the global economy, which needs to see a more evenly balanced Chinese economy.

Some say it will be bad news for Chinese manufacturing, as rising labour costs mean it will lose its competitive edge. So, goes the argument, jobs will be lost to the likes of Indonesia and other countries in South East Asia. Jobs may even be lost to the US, and indeed a report today said that Foxconn — the company which makes Apple’s products in China (as well as products for rivals) — is looking at setting up TV assembly plants in LA and Detroit.
But then again, Chinese manufacturing is moving up the value chain, and data indicates that despite rises in Chinese wages, Chinese productivity per unit of labour is rising.

But the second reason for noting Mr Hu’s speech is the emphasis he placed on fighting corruption or 'graft', as he called it.

Mr Hu said: "Combating corruption and promoting political integrity, which is a major political issue of great concern to the people, is a clear-cut and long-term political commitment of the party. If we fail to handle this issue well, it could prove fatal to the party, and even cause the collapse of the party and the fall of the state. We must thus make unremitting efforts to combat corruption."
He continued: "All those who violate party discipline and state laws, whoever they are and whatever power or official positions they have, must be brought to justice without mercy.2

And guess where the TV camera went when Mr Hu expressed those words. Why, straight to the face of Wen Jiabao.

Writing in the Telegraph, Ambrose Evans-Pritchard suggested the changeover in power will lead to a lurch back to the left, and the anti-reformists will gain control. See: China's Hu Jintao clings to socialist economy in Mao nostalgia speech

Maybe. The truth is that we don't know. Take Bo Xilai; he is the disgraced former high flyer in Chinese politics, whose wife was found guilty of murdering British business man Neil Haywood. When Mr Bo was a commerce minister, he was considered to be something of a liberal. When he was promoted to Party chief in Chongqing his views seemed to change out of all recognition, bringing back memories of Mao. So who knows what China’s new generation of leaders will say once they gain power.

But what we can say is that China is entering an important period. For growth to continue, China needs more free markets, more enterprise, and more dynamism.

But does more capitalism lead to more calls for democracy? In ancient Greece, the military innovation called the phalanx meant ordinary soldiers became more important; more vital to military success. Some say the development of the phalanx led to the development of Greek democracy. In China, workers are set to become more important for continued growth. Will their greater economic power, mean they will demand more political power?

What is for sure is that no Chinese senior politician wants to be remembered as China’s Mikhail Gorbachev. Mr Hu’s likely successor Xu Jinping and Mr Wen's likely successor Li Keqiang don’t want to be seen promoting the Chinese equivalent of perestroika and glasnost. So somehow they must find a half-way route. Reform, but not too fast. And finding that will prove to be very hard indeed.

This article is ©2012 Investment and Business News, who also offer a fantastic newsletter that you can sign up for at http://www.investmentandbusinessnews.co.uk/

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