As the five-yearly National Financial Work Conference ended on 15 July 2017 and many observers focused on the announcements on financial and other reforms, almost everyone missed a crucial event that happened on the day after: the replacement of a prominent local Communist party chief with a pro-reform presidential protégé.
In our view, this event will greatly influence the delivery of the policy directions set by the Work Conference, including financial reforms, macro-prudent management, systemic risk control, debt reduction and regulatory reform (rumour has it that the conference might have boosted the regulatory role of the People’s Bank of China so that it surpasses all other regulators in authority). The conference also set policies for capital account liberalisation, renminbi internationalisation and the massive Belt & Road infrastructure initiatives.
The answer to the question whether the government can deliver on the broad directions set by the conference lies in the composition of the new Standing Committee of the Politburo (SCP), which will be announced at the 19th Party Congress (expected November 2017). A stronger and more reform-oriented SCP can be expected to implement more and deeper structural reforms and further debt reduction. That is why the removal of Politburo member Sun Zhengcai from his post of Chongqing party chief for ‘violating Party regulations’ matters. It affects the balance of power between reformers and conservatives in the SCP.
One of the conservative old growth-model supporters (i.e. a non-reformer), Sun had been expected to advance to the SCP. Replacing him is Chen Min’er, an ardent reformer and President Xi Jinping’s protégé. The shift suggests that President Xi’s power-base is giving him increasing political control. According to our initial analysis, the elevation of Mr. Chen changes the political dynamics significantly in favour of the reformers.
Our calculation shows that, ceteris paribus, this event could boost support for reform in the SCP from the current 43% to 70% in President Xi’s second term, which will start next year. This is positive for China’s structural reform and deleveraging Outlook.
Written on 17/07/2017