China watchers have eagerly awaited the results of the Communist Party’s 19th National Congress. This once-in-five-years meeting determines the new leadership as well as the key directions for policy. Concerning economic policy, however, we will have to wait a few more months to know if there is really any shift.
President Xi Jinping started the congress with a three-hour speech. Much of it was devoted to military and security issues, as well as general aspirations about China’s growing role in the world economy and system up to 2049, which will be the 100th anniversary of the founding of the People’s Republic of China. We would not normally look to this kind of speech for policy specifics. President Xi spoke about ensuring the “market-based allocation of resources.” He also noted that “business survival will be determined by competition.” These phrases suggest a shift toward a more market-oriented economy. However, he also promised to “support state capital in becoming stronger.” Ever since Xi took over as president five years ago, major documents and speeches have typically had this contradiction: promises to become more market oriented combined with support for state enterprises as the backbone of the economy. In terms of implementation, so far under Xi there has been relatively little liberalization of the economy. Hence, it is difficult to know how seriously to take the latest promises.
One of the challenges faced by the Chinese economy is that the leaders have kept the growth rate high through rapid expansion of credit. Before the global financial crisis, China was quite remarkable in that for a long period it took one yuan of credit to generate one additional unit of GDP. Since the global crisis, however, it now takes three yuan of credit to generate a unit of GDP. Simple arithmetic reveals that debt-to-GDP rises very quickly under these conditions. Overall leverage is now getting into dangerous territory for China. At the recently concluded International Monetary Fund meetings China’s central bank governor, Zhou Xiaochuan, was surprisingly frank in public, warning of the risk of a “Minsky moment” in which asset prices buoyed by liquidity and exuberance suddenly collapse. Governor Zhou has reached retirement age and will likely step down soon, which may have emboldened him to be frank about the need to rein in credit in China.
Technocrats in China know what needs to be done to sustain growth and reduce risks: tighten liquidity; encourage a more market-determined allocation of credit; open up the remaining closed sectors of the economy, especially services; let the state enterprises that cannot survive in this competitive environment exit (per Xi’s speech); and help adversely affected communities and workers with more social spending and a stronger safety net.
Some indication of whether China’s economic reform will accelerate can be found in the personnel decisions at the top. Xi and Li Keqiang were kept in the top two spots, president and premier. The other five members of the Politburo Standing Committee had reached retirement age and had to step down. There was some speculation in advance that Wang Qishan, a seasoned technocrat and ally of Xi’s, would be kept on and perhaps even emerge as premier. This was always unlikely, and it was no surprise to China observers that he retired per age restrictions.
The five new members largely follow succession norms that are based on seniority and the result is a Standing Committee with remarkable balance. Li Keqiang is joined by Wang Yang; both of them are from Hu Jintao’s Communist Youth League faction. Han Zheng and Wang Huning are part of the “Shanghai gang” around former president Jiang Zemin. And Li Zhanshu and Zhao Leji are close proteges of Xi. Thus, each of the three most recent presidents (including Xi himself) have two proteges on the committee. These different factions do not differ very much on policy. A good argument can be made that this kind of balanced standing committee is best for reform. Implementation of reform requires cooperation of a vast bureaucracy and trade-offs among interest groups. If some part of the bureaucracy is disgruntled they can effectively resist change. Xi did get his name added to the constitution, which now references “Xi Jinping’s thinking on socialism with Chinese characteristics for the new era.” He also managed to keep any potential successors off the Standing Committee. This does not mean that he will necessarily continue after five more years, but it does mean that he does not have to share the stage with a designated successor. The 19th Party Congress has laid a foundation for some acceleration of reform—but don’t expect anything dramatic as it remains to be seen if the new lineup can deliver.