China’s Communist Party concluded its first plenary session of the 18th Congress, and announced the new party leaders, including the General Secretary, the seven-member Politburo Standing Committee, and the Party’s Military Committee. This is a once a decade leadership transition and the core of power will lead the country in the next 10 years. As expected, Xi Jinping is crowned as the Party’s new General Secretary and will be the president, while Li Keqiang, listed as the number two man, will take over the premier position. The official transition will be in March 2013 at the National People’s Congress.
There are three interesting developments from the Party Congress:
- First, the number of Politburo Standing Committee members is reduced from the previous nine to current seven members, which should facilitate a more efficient decision making process as China is still running on a consensus-driven policy approach on the top.
- Second, Xi is also elected the Chairman of the Party’s Military Committee. This arrangement is different from the last two leadership transitions, as both Deng Xiaoping and Jiang Zemin continued to hold their Military Committee chairmanship for a few years after they left the Party’s Standing Committee. The fact that Xi’s immediate consolidation of power within the Party’s Standing Committee and the Military Committee shows the strong backing he has to exercise his leadership, as it allows the new leadership to make decisions with fewer legacy issues and should be conducive to reforms.
- Third, Wang Qishan, the current vice premier in charge of economic and financial policies and reputable crisis manager, was appointed head of the Party’s anti-graft commission. This appointment may herald a more serious effort to fight corruption, an issue that has caused serious social anger against the Party in the recent past.
On Xi’s speech to the Party, Xi said: “Our responsibility now is to lead China in making continued efforts to free up our minds, carry out reform and opening up, further release and develop the productive forces,” and “Our people have an ardent love for life. They wish to have better education, more stable jobs, more income, greater social security, better medical and health care, improved housing conditions, and a better environment. They want their children to have sound growth, have good jobs and lead a more enjoyable life. To meet their desire for a happy life is our mission.” In the China political context and compared to the past, these statements emphasize more the needs for reforms and improvement of social lives. It probably shows that the new leaders view reforms and improvements for people’s lives as vital to the survival of the Party and for the continued economic prosperity of the country.
Our view is that the change in personnel in the Communist Party should have limited impact on economic policies in the short term before the official transition in March, 2013. Xi, as President Hu’s number two, and Li, as deputy to Premier Wen, have already played a large role in setting policies over recent years. Meanwhile, the economy is showing signs of stabilization, so the sense of urgency to boost growth has disappeared. The next development to monitor is the Economic Working Conference in December 2012, which will be the first platform revealing the new team led by expected premier Li.
It is not likely that big structural reforms are being pushed out overnight as the incoming president Xi and premier Li will need the first couple of years to solidify their power base. However, the new leadership is under tremendous pressure to address issues generated from decades’ fast growth in China. Either by choice or not, we believe reforms will accelerate under the new leadership. New initiatives of serious reforms are likely to be started by the new leadership to address challenges like crony capitalism, enlarging wealth inequality, aging population, shrinking young labor force and lack of legal framework.
In the near term we expect:
- Ongoing financial sector reforms to address issues of inefficient capital allocation and unlock productivity in the economy,
- Abolition of the “One-Child-Policy” to address the demographic issue, and
- Increased transparency of budget and fiscal spending to constrain government officials and address local government debt issue.
In the medium to long term, we expect:
- Reform of Hukou (the urban resident system) which discriminates against migrants and limits the labor force movement among the country, and
- Rural land reform. Rural lands still are collectively owned and farmers cannot sell their lands. This system hinders farmers’ willingness to reinvest and impairs farming efficiency.
We know that China’s reforms will face many difficulties as many of these reforms would endanger the benefits of important vested interest groups.
Related reading: China — Stumbling or stabilizing?