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Xi’s Iron Grip on Power Adds Pressure to Deliver China Reforms

Posted: October 26, 2017 at 6:47 pm   /   by   /   comments (0)

The reshuffle immediately creates space for Xi to focus on his three-decade vision of turning China into a leading global power, complete with a strong military, thriving middle class, enhanced global clout and a clean environment. That has bolstered optimism among some in the markets that Xi will follow through with reforms, even as others warn of longer-term risks stemming from the lack of clarity over succession.

“I expect the economic reform steps will be bolder and bigger during the second term,” said Hong Hao, chief China strategist at Bocom International Holdings Co. in Hong Kong. “Power centralization means quicker decision making and smoother policy implementation.”

During his first term, Xi looked to assert his control over the party with a wide-ranging anti-corruption campaign and boost China’s global clout with an Asia-to-Europe infrastructure initiative. He has reassured the world that China won’t seek hegemony as it grows more powerful, and sought to avoid a conflict over North Korea with U.S. President Donald Trump, who is scheduled to visit Beijing next month.

Many investors, however, were left underwhelmed even as Xi steadily accumulated power in his first five years. National champions were nurtured. Foreign companies continued to face obstacles in key sectors like finance. Technology transfers were demanded for market access. The currency remained sheltered behind a barrier of exchange curbs and restrictions on overseas investment.

“The degree to which he has consolidated power is to some degree a positive for economics,” said Brian Jackson, China director at Medley Global Advisors, which provides policy advice to institutional investors. “Over the last five years a huge amount of policy documents have come out with very limited implementation, mainly because of anti-corruption. So this provides some scope for refocusing on the economy.”

Inefficient state-owned enterprises and ballooning corporate debt pose threats to stability even though economic growth has surprised on the upside in recent quarters. S&P Global Ratings last month cut China’s sovereign rating for the first time since 1999.

Xi last week signaled a shift in priorities to address income inequality rather than hitting economic growth targets. Some of China’s biggest companies responded immediately, with Jack Ma — China’s richest person and founder of Alibaba Group Holding Ltd. — saying that entrepreneurs who’ve obtained affluence have a responsibility to help others catch up.

More than anything, however, Xi emphasized the need to expand the Communist Party’s control over all aspects of policy making, saying the organization “leads everything.” His remarks on reform — pledging to open up to foreign businesses, deepening state-run enterprise reform, strengthening financial sector regulation — stuck closely to language that had previously disappointed investors.

“Western economists who are hoping for a liberal economic agenda being rolled out will be sorely disappointed,” Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong, told Bloomberg Television on Thursday. “In many ways, this is about strengthening control, in terms of direct industrial policies, a form of state-guided development.”

All five men appointed Wednesday to join Xi and Premier Li Keqiang on the Politburo Standing Committee will be too old to rule for a decade after Xi finishes his second term. Those promoted were Xi chief of staff Li Zhanshu, 67; Vice Premier Wang Yang, 62; party theorist Wang Huning, 62; new anti-graft chief Zhao Leji, 60; and Shanghai party secretary Han Zheng, 63.

“Forty years of reform and opening up has made it possible for our people to lead decent, even comfortable lives,” Xi said in remarks to reporters in Beijing on Wednesday. “It’s my conviction that the great rejuvenation of the Chinese nation will become a reality.”

Xi is likely to continue his anti-graft campaign, tackle concerns over rising debts and rebalance the economy, according to Patricia Thornton, associate professor of Chinese Politics at the University of Oxford. Even so, she said, Xi’s decision to refrain from designating a successor has injected “an even higher degree of uncertainty into the upper echelons of the Party.”

“There is likely to be intense strategizing unfolding behind the scenes,” Thornton said.

Xi can still promote an heir at any time. The Politburo featured three younger officials who could potentially succeed him: Chen Miner, 57, Chongqing party chief and former Xi aide; Ding Xuexiang, 55, who appears in line to become Xi’s new chief of staff; and Hu Chunhua, 54, Guangdong party chief and the protege of Xi’s predecessor.

At the moment many investors are too complacent about Xi’s lack of a succession plan, said Andrew Polk, co-founder of research firm Trivium China in Beijing.

“We’ll start to learn whether the system has any checks and balances,” Polk said. “Otherwise, we’re all just relying on Xi’s altruism to be potentially the most powerful man in the world and not have that get to his head. It hasn’t worked out too well in other places.”





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