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Beijing's annual political bash to offer a glimpse of the future

Observers will be looking for clues about the economy and Xi's grip on power

The National People's Congress meets at the Great Hall of the People in Beijing in March 2016. (Photo by Akira Kodaka)

HONG KONG For the past few weeks, Beijing has been busy clearing its skies of smog, ramping up security and heightening its surveillance of the internet. All of this is in preparation for China's upcoming political extravaganza, which each year brings together thousands of delegates, costumed ethnic minorities and a veritable United Nations of journalists.

Every March, two top-level meetings -- the Chinese People's Political Consultative Conference and the National People's Congress, the nation's parliament -- converge on the calendar to form what is widely referred to as the lianghui, or "two sessions." Part of what makes the event so highly anticipated is that it tends to offer clues about China's political and economic future.

When Premier Li Keqiang delivers his state of the nation address on March 5, it will be scoured for hints about growth targets, government priorities and fiscal budgets.

Many observers expect the upcoming lianghui to be a politically charged prologue to the party's 19th National Congress this autumn. Held every five years, the Party Congress is the country's highest organ of state power. It is tasked with picking the future leadership, including the ultimate decision-making body -- the Politburo Standing Committee -- which will see five of its seven members reach retirement age this year.

"As the most important policy event before the 19th Party Congress, the overarching theme should be stability with a bias toward structural reform, which means a modestly less-dovish policy setting than in 2016," Yao Wei, Societe Generale's China economist, wrote in a report. She predicted that the country's growth target for 2017 will be eased to "around 6.5%" from last year's range of 6.5% to 7%.

TIGHTENING AHEAD? Kevin Lai, Daiwa Capital Markets' chief economist for Asia ex-Japan, advised investors to "be prepared for a certain level of tightening." He said he anticipates a greater emphasis on "challenges from excessive liquidity growth, a frothy housing market and potential inflation pressure." He also told investors that a more aggressive fiscal policy, set with a 3% deficit target, would be in place to counteract a more neutral monetary policy, notwithstanding the "considerable crowding-out effects."

The change in monetary stance will likely be reflected in curbs on shadow banking, according to David Dollar, senior fellow at the China Center of Washington-based think tank the Brookings Institution. "Credit has been growing very rapidly, especially outside the normal banking system, in wealth management products, for example," said Dollar, who regards excessive leverage as China's most pressing economic challenge. In addition to piling on more risk, he said, such leverage also exacerbates the outflow of capital from China by compromising returns on domestic investment, especially when the country's savings are high.

But political uncertainty also means the government will be less inclined to push through "bold" reforms this year, apart from some changes at the minister level, Dollar said.

The state-run Xinhua News Agency announced on social media on Feb. 24 that He Lifeng, a former vice chairman of the National Development and Reform Commission, had been promoted to the head of the agency, which is responsible for regulating prices and approving major infrastructure projects, and now has the added task of cutting excess capacity in the mining industry. Zhong Shan and Zhang Jun, meanwhile, were elevated to the posts of commerce and justice ministry chiefs, respectively, according to Xinhua.

Also on Feb. 24, Guo Shuqing, former chairman of China Construction Bank and head of the China Securities Regulatory Commission, was reportedly tapped to lead the China Banking Regulatory Commission. Guo has earned a reputation as a proactive market reformer, credited with modernizing the financial sector in Shandong Province, where he has served as governor since 2013. Some see the apparent appointment of Guo as heralding a merger of the watchdogs for the banking, securities and insurance sectors into a single "megaregulator."

The current head of the securities watchdog, Liu Shiyu, told reporters on Feb. 26 that the agency would work more closely with the China Insurance Regulatory Commission to clamp down on financial misconduct. He likened those practicing leveraged buyouts of listed companies to "barbarians," "evil spirits" and "large crocodiles," who take advantage of loopholes at the expense of small investors. "We will cling to every clue we find. The old tricks won't work anymore," said Liu.

Liu's colorful remarks came shortly after misdeeds at Foresea Life and the insurance unit of property developer Evergrande Group got them into hot water with the insurance sector regulator.

Foresea Life, perhaps best known for acting in concert with Baoneng Group to launch a hostile takeover bid for Shenzhen-listed homebuilder China Vanke, was found guilty of "providing fabricated information" and "misusing insurance funds." Its chairman, Yao Zhenhua, was immediately removed from his post at Foresea and barred from the domestic insurance industry for a decade. Separately, Evergrande Life was found to have violated stock investment rules last year, earning the company a one-year ban from the equity market, among other penalties.

CONSOLIDATING POWER These incidents have added more context to the mysterious disappearance of financier Xiao Jianhua, a 45-year-old Chinese-born Canadian citizen, from his residence at the Four Seasons in Hong Kong. Xiao, founder of the Beijing-based Tomorrow Group, is known for striking big-ticket deals involving high-ranking officials and well-connected Chinese "princelings." Xiao admitted in a statement that he had helped relatives of President Xi Jinping shed their financial assets before Xi assumed office in 2013 and launched his far-reaching anti-graft campaign.

"Anti-corruption is the key apparatus through which Xi consolidates his power," said Johnny Lau Yui-siu, an independent political commentator based in Hong Kong. China's spending on public security has steadily risen in recent years. In 2016, the budget was set at 166.8 billion yuan ($24.2 billion), up 5.3% from the previous year.

Some critics said this figure is grossly underestimated, as it does not include specific numbers for local governments. The last time the full budget was disclosed was in 2013, when the domestic security budget rose 8.7% on the year to 769.1 billion yuan, exceeding the military budget of 740.6 billion yuan.

"We have to pay attention to whether [Xi] is going to establish a super-surveillance body called the National Inspection Committee," Lau said. "The initiative, in gestation for some time, is meant to put different anti-corruption units under a single roof."

Lau said that if the top job at the new surveillance organization goes to Wang Qishan, a close Xi ally, chances are that Wang will get the nod to retain his membership in the Politburo Standing Committee when the Party Congress convenes in autumn, despite being past the retirement age.

"Wouldn't that mean Xi could also cling to his position at the age of 69 [at the 20th Party Congress]?" asked Lau. "Is lifetime employment going to be revived?"

Lau said Xi's success in centralizing power over the past few years suggests that any power struggles are likely to be tame for the time being. He warned, however, that brewing discontent over radical centralization could surface during times of economic hardship.

On Feb. 21, the government website published a Xinhua report saying that the Central Politburo had singled out 2017 as being a significant year for the Communist Party and the country's development, citing the upcoming 19th Party Congress. It stressed that all party members had to follow President Xi, whom it referred to as the "core" leader, in thought and spirit.

"At the moment, there isn't another faction strong enough to challenge Xi," said Lau.

Lau said no other leader in modern Chinese history has built up such a strong grip on power so quickly. "[While in power] Mao Zedong and Deng Xiaoping never called themselves 'core' leaders. It took Jiang Zemin 13 years," he said.

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