Will China’s new political top table be more reformist?

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There have been major personnel changes at all levels of the Chinese government since 2016 in preparation for the second term (starting in 2018) of the Xi Jinping regime.

But the most crucial change will come when Beijing announces the new set-up of the Standing Committee of the Politburo (SCP) at the 19th Party Congress due to take place in October or November this year. Of the seven members of the Standing Committee of the Politburo, all except the president and the premier will have to retire.

There is much speculation about the composition of the new Standing Commmittee of the Politburo as it will determine China’s growth and reform policy outlook over the next five years. Here, we provide an educated guess based on our contacts in China.

We should first recognise that there are two opposing forces: the conservatives (supporters of the old economy model) versus the reformers (supporters of the new growth model).

If we can figure out which force will dominate the new Standing Commmittee of the Politburo, we will have some clues about the outlook for policy reform during President Xi’s second term, including state-sector reforms, debt reduction, capital account convertibility and financial liberalisation. To make this analysis, we have narrowed down the number of highly-likely contenders for places in the Standing Commmittee of the Politburo to form different scenarios for assessment.

From now to the future

Under the current set-up, three of the Standing Commmittee of the Politburo members – President Xi Jinping, Premier Li Keqiang and Mr. Wang Qishan (who is in charge of the anti-corruption campaign) are strong reformers. One member, Mr. Liu Yunshan, does not have a clear-cut stance but seems recently to have erred on the conservative side. The remaining three are die-hard conservatives (see Exhibit 1).

Exhibit 1: Current Standing Committe of the Politburo (July 2017)

Source: BNP Paribas Asset Management Asia, as of 19/07/2017

This means that President Xi Jinping has never had full support from the Standing Commmittee of the Politburo for his reform initiatives since he took office; only three out of seven members of the Standing Commmittee of the Politburo support structural reform. The lack of consensus has been apparent in the resistance to reform and policy flip-flops during his first term.

Any conjecture about the new Standing Commmittee of the Politburo set-up needs to consider four significant political traditions (although these are not carved in stone):

  • The retirement age for top leaders (68 years old): Will President Xi Jinping break the tradition and keep Mr. Wang (who will turn 70 in 2018) in the Standing Commmittee of the Politburo?
  • Appointment of a successor: Will Mr. Xi name his successor at the Party Congress?
  • The size of the Standing Commmittee of the Politburo: Will Mr. Xi shrink it again (he cut the size from nine members to seven when he took power in the last Party Congress in late 2012)?
  • The new members of the Standing Commmittee of the Politburo: Will Mr. Xi be able to bring in all his reform-minded supporters?

An ideal politburo for reform

There are many potential outcomes as uncertainty about the political horse-trading is high. Ideally, if Mr. Xi could keep Mr. Wang and bring in his reform supporters, he would be able to form a strong, reform-oriented Standing Commmittee of the Politburo to accelerate and deepen structural reforms in his second term. In this case, to consolidate his control and maximise the reform momentum, Mr. Xi might cut the number of the Standing Commmittee of the Politburo members to five, break the age convention and keep Mr. Wang. He would probably also not name a successor to ensure long-term personal control, having already been accorded the status of ‘core leader’ at a closed-door Party meeting in October 2016. Exhibit 2 depicts this hypothetical, ideal, Standing Commmittee of the Politburo, entirely composed of reformers and Xi supporters/protégés.  Ceteris paribus, Chinese assets would be revalued sharply under this scenario.

Exhibit 2: A pro-reform Standing Commmittee of the Politburo with Xi supporters

Xi JinpingSource: BNP Paribas Asset Management Asia, as of 19/07/2017

However, this set-up will conflict with some basic Party principles, namely:

  • No lifetime tenure for any officials, including the president
  • A collective leadership structure
  • Division of responsibilities among top leaders.

All senior leaders since Deng Xiaoping have adhered to these principles. Were Mr. Xi to push for this ideal set-up, which would make the Standing Commmittee of the Politburo his de facto personal advisory body, he would open himself to serious challenges by the system/Party elders. So this outcome appears unlikely.

A sub-optimal Standing Commmittee of the Politburo (base case)

In reality, Mr. Xi will probably have to compromise on some of the Party principles (such as the retirement age and appointment of a successor) to get more of his supporters on board. In this case, he might keep the current size of the Standing Commmittee of the Politburo (seven members), replace all five retiring Standing Commmittee of the Politburo members and appoint a successor. This could be Hu Chunhua, who has the blessing of former president Hu Jintao. He might entrust another close ally, Li Zhanshu, to take over the anti-corruption portfolio from Mr. Wang Qishan. This possible composition of the new Standing Commmittee of the Politburo would contain more Xi supporters and reformers, with a minority who are not (Exhibit 3).

Under this outcome, Mr. Xi would get at least four reform supporters and maybe as many as all six. This would boost his reform support significantly, with at least five (including the President) out of the seven Standing Commmittee of the Politburo members supporting structural reforms compared to three in the current Standing Commmittee of the Politburo.

Exhibit 3: A sub-optimal Standing Commmittee of the Politburo (base case)

Xi JinpingSource: BNP Paribas Asset Management Asia, as of 19/07/2017

The bottom line

We believe the odds are high that the new Standing Commmittee of the Politburo will be more reform-oriented than the existing one, meaning that structural reform policies, including efforts to cut debt, will progress more quickly and deeply than in President Xi Jinping’s first term. Reform resistance looks nonetheless set to remain, although likely less disruptively than has been the case so far. This may mean a ‘Goldilocks’ state for China as it maintains economic stability while also moving forward reform.


Written on 19/07/2017

Chi Lo

Senior Economist for China

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