Date
12 December 2017
The language during the 19th Party Congress suggests that China will become more assertive on the world stage and Beijing will push its unique model of political economy. Photo: Reuters
The language during the 19th Party Congress suggests that China will become more assertive on the world stage and Beijing will push its unique model of political economy. Photo: Reuters

How policy shifts will impact China’s economy

China’s 19th Party Congress has concluded with Xi Jinping cementing his role as China’s most powerful leader since Mao Zedong. There is no need to restate how powerful Xi is; he is only the third leader to have his name included in the constitution and the first living leader to be included since Mao Zedong.

While this was broadly anticipated, it’s no less significant. The inclusion of Xi’s name while he is still in power adds unprecedented authority to his initiatives and represents a significant break from political norms over the past several decades. Any cadre who is not pursuing Xi’s agenda is now in direct violation of the constitution itself.

Furthermore, the lineup of the Party’s most senior body, the Politburo Standing Committee, also broke with modern political tradition by not including a clear successor. But make no mistake; regardless of whether a successor emerged, Xi Jinping is positioned to rule China for as long as he’s healthy.

The party constitution enshrined Xi as the indefinite core leader, meaning regardless what title he holds he will continue to set the agenda. Whether he continues to break norms by pursuing a third term as president, or whether he follows the example of Deng Xiaoping by ruling from behind the scenes it will be increasingly clear that Xi Jinping intends to remain in power.

The era of decentralized, factional decision making has come to an end and power has been firmly concentrated under one man. With this comes the potential to overcome vested interests opposed to reform but also brings exceptional risk.

This leads to the broader question of how Xi plans to use his power. The optimistic view holds that with fewer political barriers, Xi will forge ahead with market reforms. Our view is less sanguine though, that Xi’s priorities are not liberalization but rather a stronger state, a stronger party, and a more muscular foreign policy.

While we make no claims to know what Xi Jinping truly wants, his words and actions give indications what his priorities are. First and foremost, the language during the Party Congress (and China’s policies over the past five years) suggests that China will become more assertive on the world stage and Beijing will push its unique model of political economy as an attractive alternative to Western liberal democracy.

The era of hiding and biding has officially come to an end as Xi declared that China “has become a great power in the world” and “it is time for us to take center stage in the world and make a greater contribution to humankind”. This risks exacerbating tensions in East Asia. The Chinese are expanding their global ambitions at the same time Japan is led by a leader with an equally strong (democratically elected) mandate and the US is led by the weakest leader in generations.

Secondly, Xi is trying to evolve the social contract between the people and the party; moving away from the party as sole provider of material wealth to one where the party provides a higher quality of life and restoration of China as a global superpower. Xi stressed China’s new era affirming a move away from the previous model which brought unprecedented growth but also unprecedented wealth gaps and environmental degradation.

The social contract and party’s legitimacy will increasingly rest on growing China’s global clout and, to an extent, improving the well-being of average Chinese. While potentially disregarded as Party rhetoric, Xi appears serious about rebalancing the growth model to one that is more sustainable, greener and more equitable.

But the path is unclear. A reduced role of the party is one of the primary causes of robust growth over the past three decades, by inserting the party as a more forceful role risks reducing economic vitality. Furthermore, there are no straightforward levers to pull in a centrally directed economy that is set up to maximize production, not wellbeing.

How will the economy be impacted by these policy shifts?

– It’s implied that the government will eventually abolish the growth target and be more accepting of slower growth. But just as Xi laid the groundwork for party priorities through 2035, I suspect this will not be an immediate change but rather one that takes prominence after 2021. There will still be a bottom line and systemically important employers will still be protected.

– Greater centralization noted above could mean less local government reform experimentation and more centrally directed policies. This is dangerous for reform and productivity as traditionally the most effective reforms have started at the local level.

– The party’s control over the private sector will continue. The work report proclaimed “a new kind of relationship between politics and business” which foreshadows more party-state control over the private sector. This would continue a recent theme, with the party having installed cells in private firms, and the state to gain board seats in tech companies. Implied from this shift is fewer but stronger and more powerful SOEs.

– Environmental concerns are to be one of the highest priorities; in both Xi’s speech and constitutional language, it was signaled that development at the expense of the environment will not be tolerated. This is less a factor of Xi Jinping’s policy priorities and more borne out of necessity and opportunity – the environment is near the point of no return and less pressure for job creation alleviates growth pressure; simply put, the timing is right for this to be a priority.

– Capital account reform is no longer a priority. The phrase “a steady push for full capital account convertibility”, from the last report, was notably discarded, highlighting concern about capital outflows and their destabilising effects.

– Lastly, openness to foreign investment was routinely highlighted, suggesting the sharp slowdown in FDI is having an impact on policy decisions. FDI into China contracted by 6.5 percent year on year through August and only slightly bounced back since then. Sensitive sectors such as education will remain closed but sectors where China still needs to absorb foreign know-how, such as EV, semiconductors, AI, finance, and supercomputers may open to greater FDI.

– Contact us at [email protected]

RT/RA

Senior Emerging Markets Economist, Aberdeen Standard Investments

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