China’s current administration is in a relatively stable position having engineered an apparently successful soft landing of the economy following the global economic crisis. Its main political objectives have been maintained, while increasingly focusing on the economic transformation to ensure sustainable long-term development.

The 12th 5-year plan (2011-2015) will play an important role in solidifying these gains. As the country gears up for a leadership transition in late 2012, an even greater emphasis will be placed on stability, which will deter directional changes in policy. A main political objective of the current leadership has been redressing the social and environmental damage caused by 20 years of rapid growth. The creation of a “harmonious socialist society” is central to the overall plan that strives to maintain a growth rate above 7 percent in the coming years.

The Chinese leadership also is focusing on improving governance, reducing corruption, widening social security coverage, improving health and education systems, enforcing environmental regulations and supervision, and lowering the income gap. To achieve this, it must overcome increasing resistance from a coalition of interest groups that benefit from the current status quo. These include regional governments and politicians, and in particular, the wealthy and powerful state-owned monopolies and their related ministries.

The 2008-2009 stimulus plan further strengthened these groups, which favor a stronger position for state-owned companies, market protectionism, market access controls, and government interference in procurement. This coalition of interest groups will create obstacles for foreign and Chinese public and private companies. In the longer term, this could lead to social and economic instability as the growing middle class feels increasingly disenchanted.

A main priority of the government is to achieve a more sustainable and consumption-driven model. A number of new policies to be drafted encourage growth of China’s service industries, which are anticipated to contribute more to the overall economy. The government also will continue to implement measures to further combat inefficiency and overcapacity problems in a number of industries. Plus, it plans to develop new emerging industries in biotech, energy conservation, alternative energy and new materials, as well as encourage domestic innovation. Foreign companies will have the opportunity to enter or gain limited access to several industry sectors which were previously restricted to foreign investment.

On the international scene, China is paying more attention to its image, in order to appear less as a contender for global dominance with the U.S. and more as a developing country focused on its own development. It also is attempting to position itself as a responsible (and indispensable) player in the global political arena, especially in relation to the continuing reverberations following the international financial crisis.

Trade relations with the United States and the European Union remain complex and are becoming part of a wider range of issues. These not only include market access, a level playing field for western companies in China, quality control of Chinese exports and the Chinese trade surplus, but also China’s cooperation in addressing the aftermath of the global financial crisis and its support in solving international problems such as the North Korean issue.

Political developments in the U.S. and Europe are increasing the risk of greater protectionism. Although the Chinese currency issue has been somewhat mitigated as the Yuan resumed appreciation in 2011, lingering tensions could resurface by U.S. lawmakers challenging the administration’s approach on a whole range of U.S.-China issues leading up to the 2012 national elections.

About The Author David Hofmann [Full Bio]

David J. Hofmann is Senior Advisor at InterChina Consulting North America LLC. Based in Washington D.C., David provides insights on the Chinese market, and leads business development efforts and deal origination on behalf of North American clients.