The 19th Party Congress and the Chinese Economy

The Chinese Communist Party (CCP) will begin its nineteenth Party Congress on October 18. While the Chinese economy has done better so far into 2017 than 2016, there are a few major structural problems that remain:

non-financial sector debt is expected to reach 300% of GDP by 2022; consumption remains low, fostering high levels of poorly absorbed investment; social spending, along with the tax system, needs to become more progressive; and investment in loss-making “zombie” firms remains high. Held once every five years, the Party Congress will shuffle the CCP’s leadership, appointing new candidates to the highest party and state offices. Xi Jinping will almost certainly hold his position, yet which of his supporters gain power and which constitutional revisions are made will be important for the trajectory of the Chinese, and thus global, economy.

The major personnel questions during the Congress will focus on Xi Jinping. First, will Xi appoint a successor? Normally, the General-Secretary’s successor would be chosen at this meeting. Xi, however, has led analysts to believe that he will seek to circumvent the two-term limit on his administration and further consolidate power. By not naming a successor, Xi would indicate that he is, indeed, taking this path. Second, what does consolidated power in Xi’s hands look like? The Congress might waive the mandatory retirement age of 68 for Wang Qishan, 69, and allow him to continue in his role as Secretary-General for the Central Commision for Discipline Inspection. In effect, Wang has carried out Xi’s anti-corruption campaign, which many accuse of being a thinly veiled purge of Xi’s political opponents. Allowing Wang to stay on will signal that Xi is able to convince the Congress, still filled with many Xi opponents, to bend the rules, possible setting the stage for a third Xi term. Even with waiving the retirement rule, many of Xi’s followers may be inducted into the Central Committee and the Politburo. If Xi is successful in getting his followers into position, he will be able to pursue the policies of the last five years more aggressively. Third, what if Xi fails? While this is unlikely, it is possible. Xi’s anti-corruption campaign, centralizing tendencies, and appointment of supporters without meritocratic track records has made him a significant number of enemies. If Xi fails to appoint his supporters and secure the positions of those already in power, his opponents will leap at the chance to weaken him. While a weakened Xi may be good for China’s institutions and rule-of-law, it will introduce extreme uncertainty into a number of economic systems that have come to rely on Xi providing a measure of stability.

It is most likely, however, that Xi will succeed. If all goes well for him, Wang will remain in at least some policy-making role, he will avoid directly naming a successor, and a number of his supporters and protogés will be appointed to higher positions. What does this mean for China’s economic trajectory?

When he came to power in 2012, groups from Tibetan Buddhists to Japanese opinion leaders believed that Xi Jinping would be a moderating force for China. They were wrong; Xi was beholden only to himself. That being said, it is unlikely that Xi will upset the system of collective leadership that has steered China since Deng Xiaoping. While a number of commentators have claimed that Xi will begin the process of becoming “emperor for life” such a move is unlikely, at least at this Congress. Doing so would launch a heated political battle that would consume the CCP at a time when China faces numerous global opportunities that can be best handled with party and state stability. As such, we should expect Xi to consolidate power but largely continue along the path he has charted over the last five years. This means a continued focus on economic stability and increasing China’s regional influence.

The CCP’s goal of making China a “moderately prosperous” society by 2021 means it needs to double per-capita income from 2010 levels. To do this, the CCP has continuously opted for control over innovation, Notably, it has done so by heavily intervening in the stock market, tightening control of the yuan, and increasing its power over state-owned enterprises. It has also sought to better control the internet, allowing easier access to foreign companies’ data. Yet the Xi administration has failed to make key reforms: it has allowed the growth of an already large real estate bubble; zombie SOEs continue to take out bad loans from banks; industrial overcapacity and slowing growth have led to decreased investment; migration rules still make it difficult for rural workers to move to the more productive cities. Each of these has the potential to be a major shock to the Chinese economy, yet require major reforms to address. The Xi administration has shown little appetite for making those reforms and is unlikely to make significant changes over the next five years.

The CCP is hoping to redirect its domestic savings and industrial capacity abroad, mainly through its One Belt, One Road (OBOR) initiative. China has already invested over $900 billion in OBOR, which seeks to reorient global trade along the old Silk Road. If successful, China will have executed an economic coup, revitalizing its own economy and heavily inserting itself into the economies of its neighbors, even more than it already has. Yet this is a decades-long project, at best, and is plagued by risk. OBOR runs through Central Asia, including Pakistan, Afghanistan, areas not known for their stability. Moreover, the loans China will make to its neighbors assumes that the project will be completed on time and will be successful, a major gamble given that these governments are often riddled with corruption and inertia. Much of OBOR’s success cannot be controlled by Beijing, which leaves the Xi administration open to heavy criticism if the project fails.

Overall, it is likely that Xi will formalize his consolidation of power in the coming days. Yet while this might prove politically important, its impacts on economic will be more tempered. If Xi follows his pattern of the last five years, he will strive for more control over the economy. While this might allow him to reach the goal of a moderately prosperous society, it will not address the key structural problems of the Chinese economy which pose long-term risks. In addition, the regional economic strategy of OBOR is a massive gamble on the ability of neighboring governments to deliver on promises, with nearly a trillion dollars on the line. The Party Congress will be economically significant for how little it changes.

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