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China Communists party as economy booms     Send a link to a friend

[October 18, 2007]  SHANGHAI, China (AP) --  President Hu Jintao gave the longest public speech of his political life this week, dwelling at length on the Communist Party's social goals but spending little time on the economy. Hours later, the Shanghai stock market's key index hit a new high.

The political show is all in Beijing at a pivotal party meeting. But as Chinese leaders wheel and deal over policies and appointments, the real star -- and potential wild card -- is the economy.

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By the numbers, the timing of the congress -- held every five years -- could not be better. The stock market has more than doubled in value since the start of the year. The economy, now the world's fourth-largest, is headed for its fifth straight year of 10 percent growth or higher. Urban and even lagging rural incomes are rising by double-digit rates.

"The people's livelihood has greatly improved," Hu told the congress delegates at the meeting's opening Monday. That afternoon the Shanghai Composite index pierced the 6,000 mark for the first time.

"I've been watching the congress and I see that the leaders are quite confident about the economy," said Huang Zhenrong, as he channel-surfed in his souvenir shop in Shanghai. "I think this is a good signal. I'll try investing a bit in the market to see how it works out."

That eagerness, however, is creating problems. The communist leadership depends on a robust economy to generate jobs, raise living standards for 1.3 billion people, bolster China's rising diplomatic clout, and keep the party in power.

But economists and even Chinese officials worry the stock run-up and years of rising property prices are unsustainable. Inflation, which jumped 6.5 percent in August year-on-year, is at its highest level in more than a decade. There are concerns that allowing the rapid growth to go unchecked could ultimately derail the economic expansion, destroying household savings, worsening unemployment and angering Chinese who have grown used to rising living standards.

The stock market, which has soared six times in value in two years and was recently dubbed the "incredibubble" by one Hong Kong investor advocate, is a particular concern as ordinary Chinese pour their savings into shares.

Some investors have reasoned that Chinese leaders would keep the market buoyant through the congress so as not to spoil the mood. Next August's Beijing Olympics is also cited as a reason to keep investing.

On Tuesday, the nation's top securities regulator issued a mild warning. "I want to express my concern over the lack of risk awareness among investors," state media quoted China Securities Regulatory Commission chairman Shang Fulin as saying.

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Yet, such issues are being given scant attention at the congress, a carefully stage-managed, ceremonial event whose main purpose is to endorse Hu's second five-year term as party chief, approve his policy blueprint that is heavy on social spending and handpick the team that will help him manage the country.

Key reasons for the disconnect from economic issues are that the troubles may fade and that too firm measures to cool the economy could go awry, economists say.

"The government is extremely reluctant to give the economy tough medicine due to the popular belief among policymakers that once it cools down, it will be difficult to heat it up again," said Andy Xie, an independent economist based in Shanghai.

In his speech to the congress, Hu reiterated the government's target of quadrupling China's per capita gross domestic product by 2020 from about $860 in 2000. He repeated a pledge to slow the economy and redress widening inequalities but said the changes should not come at the expense of growth.

"We must regard development as the top priority of the party in governing and rejuvenating the country," Hu said, only alluding in passing to the "deep-seated contradictions and problems" China faces.

The International Monetary Fund took China to task in a recent report for failing to take tougher action to foster more balanced growth, by reducing reliance on exports and excessive investment in construction and factories. It urged Beijing to do more to stimulate domestic consumption and to spend more on social security and health insurance.

"We see it is in the interest of China to do all those things," IMF director Rodrigo Rato told reporters in Washington on Monday.

Instead, China's leaders have relied on piecemeal solutions, raising interest rates in small steps and ordering banks to keep more of their money rather than lend it.

"So far, they're getting away with it," said Xie.

Many experts and investors are convinced the market will continue its ascent, fueled by Chinese investors seeking higher returns than the paltry interest paid on bank savings.

"The only growth story now is China and the rest of the developing world," says Khiem Do, fund manager of the Asia Pacific Fund Inc. "Given the nominal interest rates, where would you put your money? This is very rational. There is nothing irrational."

[Associated Press; by Elaine Kurtenbach]

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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