China’s Political Tea Leaves

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The 19th Party Congress in China is winding down.  President Xi was the core leader before the Congress, and his priorities drove the agenda for the past five years.   Expectations for a dramatic shift in policy or priorities seem unfounded.  There is declaratory policy and operational policy, and much of the speeches and analysis have focused on the former.  What does China say it is going to do?  

There seems to be a consensus that the 19th Party Congress was about President Xi consolidating power.  This seems to have largely been accomplished before the Congress.  Institutional rivals, like the Communist Youth League, have largely been neutered.  Xi had already emerged as the third great leader after Mao and Deng Xiaoping.  Former Australian Prime Minister Rudd, in an op-ed piece in the Financial Times yesterday suggested that Xi has now eclipsed Deng.

Be that as it may, one of the important aspects of the 19th Party Congress is not about policies but about personal.  In particular, the issue is who will be on the Standing Committee, the executive arm of the Politburo’s Central Committee.  This will be clear tomorrow.

However, we learned today that Wang Qishan was not named to the Central Committee.  This is potentially important.  Wang is 69 years old, and under the informal rules (eight down, seven up), he was due to retire.  Some observers suggested that Xi would allow him to stay, which would ostensibly create a precedent for Xi to stay after this five-year term.  Wang has had a number of posts, but most recently has overseen the crackdown on corruption as the Head of the Central Commission for Discipline Inspection.  It is still to be seen if Wang, a confidante of President Xi is given another post that allows him to still influence the party.

Tomorrow the top leaders of the Politburo and its Standing Committee will be announced.  The important element here is that given the opaqueness of Chinese politics, insiders and outsiders are looking for clues into Xi’s successor.  The successor is picked at the start of the second five-year term.  Some suspect that Xi is not interested in picking a successor now, either because he wants a third term or to be strategically flexible.  In Chinese politics, this would be conveyed very subtly.  If the other people that join Xi on the Standing Committee were born before 1960, it would indicate that no successor has been named, given the age limits.

On the other hand, rather than have one youngster (born in the 1960s), two came named to the Standing Committee, set the stage for some competition between them.  Two candidates that have been suggested are the head of the Communist Party in Chongqing, Chen Miner, and the Party head from Guangdong, Hu Chunhua.  The former has worked with Xi, while the latter is an acolyte of former President Hu.

There could be another twist to the plot.  Previously, there were nine seats on the Standing Committee.  Five years ago this was cut to seven.  Reportedly, there has been a trend toward reducing the size of leadership bodies.  If this were to continue, it is possible that the Standing Committee is downsized again to five.

PBOC Governor Zhou has his indication to step down shortly.  There is some speculation of his successor.  Three candidates have been suggested who were confirmed on the Central Committee:  Jiang Chaoliang, who is the Party head from the Hubei province, and Securities Regulatory Commission Chair Liu Shiyu, and Banking Regulatory Commission Chair Guo Shuqing.   PBOC Deputy Governor Yi Gang was named as an alternate member of the Central Committee, which some suggest is a sign he will succeed Zhou.

Zhou has often pressed for financial liberalization.  While it may be idiosyncratic, we suspect that institutionally, the PBOC is aligned with the forces of change and reform, as opposed to say the Ministry of Commerce, who may be more allied with the force of order.  Still, it seems reasonable to expect that the next PBOC Governor influences the broad strategy and pace.  Zhou recently made it clear that there is no strong urgency to widen the 2% band that the yuan is allowed to trade against the dollar relative to the daily reference rate.  The yuan is allowed to move in a wider band against other major currencies.

Last week, Zhou warned of a Minsky moment, by which he meant a financial crisis.  Given that he was talking at the 19th Party Congress, it seems clear he was talking about China.  It seemed to be reminding his listeners of the importance of reforming the financial system.   Many foreign observers tend to focus on the aggregate debt levels and the excess capacity in numerous industries.  Most of China’s debt is on corporate balance sheets, or local government’s special purpose investment vehicles.  The central government has little outstanding debt.