October 6, 2017 1:00 pm JST
George Magnus

Party congress is Xi's moment, but how will he use it?

Power politics likely to take precedence over economic liberalization imperatives

It is not clear if more power amassed by President Xi Jinping will lead to economic reform. © Reuters

Chinese President Xi Jinping may be one of the most relaxed leaders in the world as he prepares for the 19th congress of the Chinese Communist Party in mid-October. His body language certainly reinforces that impression. He has become a "core leader" of the party, he controls the military and internal security structures, and he has amassed more power than any Chinese leader since Mao Zedong. The economy may soon cool off, but for the moment it is stable, and growing at around the government's target rate.

Across Asia, and in the wider world, Xi has been gifted an extraordinary geopolitical advantage by U.S. President Donald Trump's withdrawal from the Trans-Pacific Partnership trade agreement, his lukewarm attitudes to regional allies, and his dependence on China in the crisis over North Korea. For now, at least, Trump's rhetoric about trade wars and punishing China is gathering dust.

Xi can look forward to the next five years, including the celebrations in 2021 of the centenary of the First Congress of the Communist Party and the 72nd year of its rule, rivaling the longevity of the Soviet Communist Party, and giving confidence to China's leaders that their party will not follow a similar path to oblivion.

So, what could possibly go wrong?

First up is the upcoming congress, itself, and while its opaque nature means that we can never be certain of anything, it looks as though this will be a big moment for the president. Sinologists will watch closely the nominees to the party's Central Committee, a couple of hundred of whom will be stepping down, having reached the age limit of 68. This group will fill vacancies on the Politburo, from which seven (or possibly five) members of the Politburo Standing Committee will be drawn. These will include individuals earmarked to take over the leadership in five years. If the identities of the future leaders are not made clear, there will be speculation that Xi intends to stay in office after his term expires in 2022.

We will also be looking to see what happens to Premier Li Keqiang, who has pretty much been sidelined, his major economic responsibilities taken over by China's special leading groups. Similarly, we will want to know what happens to the anti-corruption boss, Wang Qishan. He is a close and powerful associate of the president, but at 69 he should stand down. It will be noteworthy if he stays on.

All things considered, most observers expect Xi to stamp his authority on the party and the government. There is a curious contrast, however, between the seemingly powerful leadership and other indications of insecurity, including, for example, the crackdown on "Western values," social media outlets, and the use of virtual private networks (used to breach the government's internet controls). These form part of a wider intensification of intrusiveness and censorship, which has reached into the universities and the new "social credit system" designed to track good and bad behavior by citizens.

Stalled reforms

Other things have not gone so well. The economic reform agenda, announced with great fanfare at the end of 2013 has, for the most part, stalled. Incremental changes have certainly been implemented, for example, in the governance of state-owned enterprises and compensation regimes. Pilot schemes have been launched to modify "hukou" registration for rural migrants, there have been changes in tax and revenue arrangements for local governments, and some capacity cuts have taken effect in old industries such as coal, steel and shipbuilding.

By and large though, the big supply-side reforms that were trumpeted for SOEs and local and provincial governments have not happened. Far from making progress with market-oriented reforms, China has been back-pedaling. Industrial policy has moved ahead, for example through the "Made in China 2025" plan, intended to make China a leader in new technologies -- although that operates through stronger SOEs and specific top-down targets.

There was some progress in financial liberalization at home, and with regard to capital movements, until 2015-2016, but financial instability has led to a partial reversal. Capital movements out of China, in particular, have been tightened to stabilize foreign currency reserves and the yuan. Important areas of social policy are not receiving the attention they merit, including the flimsy pension and social safety net and low standards of education in rural areas, which are still home to half of China's infants.

More urgently, credit dependency and growing problems of debt accumulation are still prevalent, despite a financial crackdown this year on the most egregious forms of misbehavior. The actions of the regulators, carrying Xi's imprimatur, have tamed, for now, some elements of credit growth. Yet the underlying pace of credit expansion remains higher than the growth of the economy, and much higher than is compatible with a real deleveraging of balance sheets. Sooner or later, Xi's government will have to deal with deleveraging, either voluntarily or under duress, and that will mean accepting lower economic growth, at least for a while, along with any political and social consequences.

Some China watchers think that having achieved his goals of control and power, Xi will use this congress as a platform from which to change course and address some of these pressing deleveraging and economic reform issues. Yet, his amassing of personal power, and the control transferred from technocrats to party officials and committees, suggest otherwise. What drives Xi is the quest to reinforce the party's dominance, not the challenges of market-driven resource allocation, liberalization and rules-based governance.

The next five years will be a test of China's ability to resolve internal economic problems and sell its Belt and Road infrastructure model, especially in China's Asian trade chains. The 19th congress will give us some serious pointers as to the likelihood of genuine change.

George Magnus is an associate at Oxford University's China Centre and former chief economist at UBS.

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