Is George Soros Right About Xi Jinping’s Third Term?

China’s government is not a big fan of George Soros. During the Asian financial crisis, the billionaire investor tried but failed to break the Hong Kong dollar peg. In 2016, when China was experiencing massive capital outflows, the People’s Daily warned him not to short the yuan. Last summer, he wrote an op-ed that President Xi Jinping “does not understand how markets work,” at a time when global investors were jittery about Chinese tech stocks being targeted by Beijing’s regulatory crackdowns.

In a fiery speech delivered at this week’s World Economic Forum in Davos, Soros made his most sensational claim yet — that Xi may not get re-elected to a third-term at the 20th National Congress this fall:

Contrary to general expectations Xi Jinping may not get his coveted third term because of the mistakes he has made. But even if he does, the Politburo may not give him a free hand to select the members of the next Politburo. That would greatly reduce his power and influence and make it less likely that he will become ruler for life.

According to Soros, Xi made two fatal mistakes this year. First, persisting with Covid-zero pushed the economy into free fall and drove Shanghai, which entered a full lockdown on April 1, “to the verge of open rebellion.” Second, Xi’s alliance with Vladimir Putin did not serve China’s best interests. In the last two years, strong exports were the Chinese economy’s trump card. Now, China has alienated its two largest buyers — the US and the European Union. Its companies are fearful of getting snagged by secondary sanctions.

Soros is not alone in thinking that Xi may be losing his grip on power. With the economy poised to grow at the slowest pace since the Cultural Revolution, speculation is rife that there’s a power struggle going on and possibly even gridlock among the political elite.

The marketplace seems to have priced some of that in. In mid-March, when Liu He, Xi’s childhood friend and a member of his inner circle, produced a statement vowing to “actively introduce policies that benefit markets,” the stock market cheered.

The mood soured just a little over a month later. On April 26, when Xi personally called for an “all out” infrastructure push to boost the economy, skeptical traders shrugged it off. Building roads, railways and water-treatment plants require the enthusiasm and cooperation of local government officials. Last year, municipalities funded over half of China’s infrastructure spending, up from around 40% in 2003, according to estimates by CLSA Ltd. The concern is: Perhaps, after so many policy flip-flops, local officials are no longer keen about central government directions and will choose to lie flat.

Where’s the Xi Put?

Traders shrugged away Xi’s “all out” vow for infrastructure spending to boost the economy.

No doubt, Xi is China’s most powerful politician in decades. In 2018, he managed to remove the two-term limit on the presidency, thereby paving the way for a third-term this fall. A year ago, through a revision in the law, he won the power to appoint or dismiss vice premiers on the seven-member Politburo Standing Committee, where he is the top ranking official. It used to be done only on the authority of the National People’s Congress, which convenes every March.

Sorry, Mr. Soros. Procedurally, it’s highly unlikely Xi will lose a third term.

Nonetheless, Xi now has a very narrow path to form a cabinet of his liking. He still appears to respect an unwritten rule that senior officials should retire when they are 68 and over. (Xi already passed that threshold but this rule does not apply to him.) If that is the case, the Politburo will be in flux this fall: At least 11 of the 25 current members will need to step down.

For Xi, even more worrying is the future composition of the Standing Committee, where we are likely to see at least three openings. In recent days, Premier Li Keqiang, the second highest ranking politician at the Committee, has re-emerged as the economic fixer and a force in his own right. Li is trying to influence the selection of his replacement as a counterweight to Xi, according to the Wall Street Journal. Xi will also lose his right-hand man Li Zhanshu, chairman of the Standing Committee, and Han Zheng, who is in charge of Hong Kong affairs.

Meanwhile, Xi’s own bench is emptying. Li Qiang, the party secretary of Shanghai who had once served as Xi’s chief secretary during his time in Zhejiang province, had been on track to join the Standing Committee, or even be nominated as the next premier. That career fast-track has now been derailed because of Shanghai’s extended Covid lockdown. “It is well known that there is dissension within the Communist Party,” Soros asserted in his Davos speech.

Proponents of the strongman argument will say Xi should be able to withstand opposition because, after all, Putin is still standing despite an embarrassing stalemate in Ukraine. But China is not Russia, which has been economically stagnant for decades. Putin’s power is based on his mastery of his country’s politics. The Chinese Communist Party’s legitimacy depends on its ability to deliver economic prosperity — and that’s now a stumbling block.

China is not Russia

In the last two decades, China’s GDP per capita soared, while Russia’s remained stagnant.

Some observers also say that Xi isn’t in trouble because the discontent and dissent is coming mainly from China’s urban elites. Indeed, Xi was popular among China’s poor. Since 2015, the People’s Bank of China showered over 3.3 trillion yuan on shanty-town redevelopments. As much as 60% of that money came as cash settlements to poorer households. But that blue-collar coalition may be disintegrating too. The 178 million migrant laborers in big cities working at factories, as delivery workers and restaurant servers, are suffering the most from the harsh Covid-zero lockdowns.

Less than half a year away from the all-important National Congress, Xi now has tons of headaches, from soaring youth unemployment, ballooning local government debt, to economic hardship all around. He’s still going to get his third term. But to retain his influence, he will have to try very hard to win the hearts and minds of his comrades this fall.

Author: Shuli Ren, Bloomberg

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