China’s leadership change and its impact on economic policy –

News, Politics and Government — By on November 5, 2012 at 8:48 PM

Nefeli Karakitsos

–  China’s leadership change and its impact on economic policy – by Nepheli Karakitsos, Research Analyst at Global Economic Research  

The Chinese Communist Party (CCP) Structure

The change in leadership in China, characterised by new appointments being made for the 18th National Congress of the CCP, is expected to take place between 22 September & 25 November this year. It is eagerly awaited to determine what economic policies and objectives this leadership plans, and how it will affect China’s economy as it continues to show compelling signals of consecutive slow growth under deteriorating world economic conditions. The CCP is led by a group of 25 members called the Politburo that oversees any important decisions that need to be addressed and determines the appropriate course of action for the rest of the government; the size however is not fixed and could be reduced this time round. The Politburo is composed by two tiers, the first are the full Members and the second is the Standing Committee of the Politburo (PSC), which is the executive committee that serves as the highest decision-making body. The PSC is expected to undergo a fundamental re-organisation as it is likely to be reduced in size this time to 7 Members from 9 and, 7 are expected to retire and be replaced. The full Politburo will also have 7 of its 16 full Members retire for the next leaders to emerge. The selection of the PSC is decided by both the exiting senior officials of the CCP and the Elders, former retired senior officials. The most critical event heralding the selection process is the Beidaihe meeting in August where most of the negotiations & decisions are deemed to be taken. The Beidaihe meeting was reported as successful this year and so a positive outcome for the formation of the new leadership. The announcement of the new appointments is expected before 25 November 2012, and will then be endorsed by the 18th National Party Congress in spring of 2013.

The delay in announcing the change in the leadership is being caused by the time needed by the CCP to unite its policy objectives over the next 5-10 years. There are two leading factions within the CCP, the ‘Princelings and Shanghai Clique’, and the ‘Tuanpai’ that have differing philosophical leanings and priorities that need to be addressed in such a way to combine the two factions with a united voice and action. The main priority of the CCP during this change of leadership is to show its capability to undergo a successful succession process, represented by a united front that would avoid any social unrest.

The two factions

Princelings and Shanghai Clique:

These officials are more closely linked to working in the coastal provinces, which are more developed, wealthier, and share close ties with the patronage network of the party including former General Secretaries and high-powered senior officials from the children of the revolutionary-era.

The Princelings and Shanghai Clique favour policies that maximise economic growth, promote the interests of China’s emerging business and professional classes, and wish to continue with economic policies that benefit the more prosperous coastal regions with a greater acceptance of growing disparities of wealth. Both Xi Jinping, the likely successor as General Secretary, and Wang Qishan who is presently a leading figure in the formulation of China’s macroeconomic policies and is likely to gain a significant post in the PSC, belong to this faction.

Tuanpai:

These officials are connected to working directly for the CCP’s nationwide youth organisation and, or working in ‘Party Affairs’ through the different Central Committee departments. These officials tend to have experience in working for inland provinces which are poorer and less developed.

The Tuanpai favour policies that pursue more balanced and equally distributed economic development to assist the expansion of the inland provinces. Such preferred policies aim to promote social harmony so as to maintain social stability and thereby bridge the disparities of wealth and address any advancing socioeconomic concerns.

The current CCP General Secretary Hu Jintao belongs to this faction and during his leadership has managed to increase their influence by allocating people that belong to this faction to important roles within ‘Party Affairs’ such as personnel administration, Youth League and management of labour. The faction confers significant importance to officials being able to rise within the party to leadership levels by acknowledging their experience in working for different Central Committee departments. These officials though often lack experience in foreign trade relations or administering the financial sector.

The likely change in Leadership

Xi Jinping (a Princeling) is likely to succeed Hu Jintao as the President and General Secretary of CCP. He is known for his balancing, survival and team-player skills, which will play an important role in finding an accommodative stance and conciliatory approach between the Princelings and Tuanpai towards the selected policies. Over the summer Xi made comments in a meeting with Hu Deping, (son of former party boss Hu Yaobang) that urgent reform with fresh vigour are required to deter social and economic malaise. The sources added that Xi and his new team of leaders would hold a series of year-end policy-planning conferences before formally taking over the reins of government power in March.

This indicates that there is serious and detailed planning taking place behind closed doors as to the policies that will reign, however it also implies delay in any necessary action to stave off the economy from crashing. This is likely to be further hindered by the upcoming and somewhat destabilising factor that the head of the central bank Zhou Xiaochuan is due to retire in January. He is seen as the key architect that created a market-based interest-rate regime, moved the yuan towards a free-floating exchange mechanism and turned it into an internationally used currency. There is speculation as to whether a new role will be found for him, possibly within the Politburo Standing Committee to further focus the reform of the banking sector. It is unknown who at this stage is likely to replace Zhou Xiaochuan as head of the central bank.

Li Keqiang, belongs to the Tuanpai faction and looks to be the prospective new Premier of the State Council, replacing Wen Jiabao thereby becoming the leading official in charge of macroeconomic policies. In the past he has been associated with seeking to reduce the income gap, modernize key industries and strengthen domestic demand.

Wang Qishan has been Vice Premier of State Council since 2008 and is experienced in finance and trade related negotiations with the U.S. He is associated with policy leanings relating to increased private sector activity, higher-rate GDP growth and reforms in the finance sector. He is a Princeling by marriage, and has support within the faction. He is likely to become PRC First Vice-Premier (Macroeconomic Policy) that includes the role of vice chairmanship of the Economics and Finance Leading Small Group (LSG), which is a working group that serves to oversee the formation and implementation of economic and finance policies. Wang Qishan is expected to promote the development of FDI and trade, liberalization of China’s financial system, national and regional tax reforms and tax-revenue reforms. However, he has close connections to many of the major state-owned enterprises so his view on state monopoly vs. privatization remains unclear.

The overall composition of the seven members of the Politburo Standing Committee could therefore be, three Princelings: Xi Jinping, Yu Zhengsheng and Wang Qishan, and Zhang Dejiang from the Shanghai Clique. Whilst the Tuanpai would be represented by Li Keqiang, Li Yuanchao and Wang Yang, who rose from the Chinese Communist Youth League. This therefore leaves the majority balance in favour of the Princelings and Shanghai Clique 4:3, which is also influenced by the Elders of the Party who seek to protect the CCP’s ruling status.

The likely policy shift

The following comments made by the exiting leadership over July and August give us an indication of possible outcomes determining forthcoming economic policies in China. In July President Hu Jintao chaired a meeting in which the need for prioritising growth was emphasised within the back drop of weakening domestic and global demand that puts further downward pressure on the deteriorating economy and could therefore threaten social stability. This resulted in a pledge by the current leaders to continue concentrating on stabilising growth in the second half of the year, leaving potential for more policy easing before the head of the central bank Zhou Xiaochuan is due to retire in January, which would be helpful to prevent further downturn. President Hu also chaired a meeting of leaders from non-Communist Party organisations on 26 July 2012, in which the government highlighted its focus on reforms expanding domestic demand, boosting grain production and supporting small firms and services, resources prices, healthcare, fiscal and financial sectors without any details being provided. This implies that fiscal packages are more likely to be used to stimulate the economy than monetary tools, which was supported by the approval of infrastructure projects worth $1tn in September 2012. Wen Jiabao also commented during that meeting that the current leadership is aware of both the large domestic and international downside risks to the economy. The fact that China last cut its interest rates twice in June and July, and that the Reserve ratio was last cut in May, indicates that monetary policy has been put on hold over the last few months as the leadership succession process takes priority; this also provides potential for a greater scope of actions to be pursued by the new leadership. The decreased emphasis on monetary policy was further confirmed during the gathering at Beidaihe towards the end of August when Wen Jiabao and other central government leaders made statements repeatedly assuring the public, the government would ensure the property market was kept under control and prevent a rebound of property prices. This signifies that there seems to be considerable emphasis at this stage by the CCP that any monetary policy will not jeopardise the actions taken to stabilise the property market.

Conclusion:

Decisions are currently being taken behind closed doors while the final negotiations surrounding the prospective policies are being ironed out between the two factions preceding the announcement of the new leadership. This leaves a largely obscured view of the upcoming results however, the consensus signals that it will be a well-balanced coalition of both factions forming the collective leadership. The overall composition of the Politburo Standing Committee is likely to have a majority of 4 Princelings and Shanghai Clique compared to 3 Tuanpai. It is significantly important that Xi Jinping is the probable President and General Secretary, for he is seen as a compromise candidate that can join the two factions in an accommodative approach, thereby keeping the CCP strong and united.

This leads to the conclusion that the overall suggested outcome of this new leadership in terms of economic policies, is it will try to balance the two factions views by giving greater focus to a fiscal impetus to stimulate the economy and a minor role to any monetary policy stimulus. This would serve as a conciliatory approach, for it would recognise the views of the Tuanpai and be demonstrative of the government’s aim to improve employment and listen to the people’s concerns, thereby reducing feelings of social unrest arising from the emerging inequality gap between the mainland and coastal provinces. In the mean-time it would also serve the Princelings in that a fiscal stimulus would aid growth and therefore assist the interests of China’s emerging business, professional classes and coastal regions. The prospective choice of Wan Qishan with his expertise in macro-economic policy matters, finance, trade negotiations and good relations with the U.S, indicates there will be an emphasis on growth through the recognised export dependence to alleviate the domestic and global economy. However time is of the essence to avoid the economy crashing into a recession and so any delay could cause irreparable damage. There are 2 major considerations in this aspect, firstly delays could arise as a result of the CCP statement that the new leaders are expected to hold a series of year-end policy-planning conferences before formally taking over the reins of government in March. Secondly, with the impending departure in January of the head of the central bank, Zhou Xiaochuan, any imminent monetary action should take place after the announcement of the new leadership expected by 25 November and before January, from that point on there is likely to be less focus on the monetary tools to assist the economy.

Once the announcements are made we can be sure the CCP’s efforts will deliver united and reliable indicators of how they will manage their economy. However, in the short run the policy shift might be delayed by another six months, thus further worsening the economic situation. In the event that economic policies are focused on fiscal impetus with an emphasis on developing the inland to stimulate the economy, as supported by the approval of infrastructure projects worth $1tn in September 2012, this would assist shipping as demand would increase to transport the necessary materials and because trade would increase by the global economy entering into a virtuous circle between China and the U.S, which has already outlined intended growth measures that would assist the U.S and global economy.

Global Economic Research provides shipping and financial advice through a quantitative and structural model. If you would like to find out about our services you can reach us on the following email address: nepheli.k@globaleconomicresearch.com.

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