Xi’s Picks for a New Government Will Plot China’s Economic Course

Policymaking in China can mistakenly be viewed as monolithic. There’s abundant evidence of factions favoring different priorities—most basically, when it comes to the economy, pursuing growth versus ensuring or expanding the Communist Party’s authority and influence.

That’s been on display in recent months, with Premier Li Keqiang calling for better balance between Covid-19 controls and growth, and Vice Premier Liu He—the country’s top economic official—vowing support for digital-platform companies in the wake of Beijing’s crackdown on the likes of Alibaba Group Holding Ltd. and others.

Both Li and Liu are expected to step down from their posts as part of a once-in-five-years leadership revamp to be unveiled at the Communist party’s congress starting on Oct. 16. In all probability, the conclave will grant Xi an unprecedented third term as party general secretary.

But whether the positions of Li and Liu are filled by pro-growth, pro-market candidates will go far in deciding the course of Chinese economic policy for years to come. More broadly, the extent to which Xi taps pliable (rather than independent) officials for the party’s Central Committee, Politburo and Politburo Standing Committee may determine China’s overall path.

Li Keqiang, center, and Liu He, second from right.Photographer: Qilai Shen/Bloomberg

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Over the past several years, promotions have been “based on loyalty to Xi first and technical ability second, meaning officials lack political stature to push back against ideology-led policymaking,” said Rory Green, head of Asia research at TS Lombard, an independent research group.

“The retirement of Liu and Li Keqiang and their probable replacement with Xi loyalists raises alarm bells for economic-policy implementation,” Green wrote in a note Sept. 21. “Missteps will be harder to avoid and more difficult to reverse.”

It took time to see where Xi’s own instincts lay. His father had a pro-reform, pro-market record. And, early in Xi’s tenure as Chinese leader, a key party leadership communique pledged a “decisive” role for markets. But the so-called Third Plenum’s missive in 2013 also said that state ownership must still play a “leading” role in the economy.

There’s little doubt which impulse Xi has aligned with since then.

While it was the private sector that propelled China’s decades of economic growth before Xi took power, its influence since then has clearly declined. The private sector’s share of total investment had tripled in the years before Xi took power, according to Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. But after reaching 65%, the sector has slumped under Xi to little more than 50%.

Shenzhen, in southern China, became a growth dynamo after Xi Jinping’s father, Xi Zhongxun, oversaw its initial growth as a special economic zone welcoming free enterprise.Photographer: Gilles Sabrie/Bloomberg

For decades, a pattern had developed in China whereby companies were largely left alone to develop new products or services, or would be given space to push back against regulators curbing their plans. Only after a market became established—electronic payments, bike sharing, person-to-person lending—did authorities set parameters.

That’s changed, and now there’s little pushback allowed, observers say. “There’s a real shift going on and it’s not conducive to innovation,” Martin Chorzempa, a colleague of Lardy’s at Peterson, said at a webinar Friday.

Peterson’s Yeling Tan explained at the same event that Xi effectively has overseen the “securitization” of economic policy—ensuring that businesses align with perceived national interest.

Even before next month’s leadership gathering, Xi has already put a strong stamp on personnel across China’s body politic.

In the People’s Liberation Army, he’s had more than 100 generals investigated, purging many, according to research group Trivium. The justice system has also been overhauled, with multiple senior figures detained. This week saw the completion of a crackdown on a “political clique” led by a vice public security minister.

Xi last October launched what his government labeled a corruption crackdown on the financial sector, a push that in May featured the removal of the head of the central bank’s monetary policy department.

So with Xi’s economic-policy priorities seemingly clear—a dominant role for state enterprises, and a private sector with limited latitude to veer from Communist Party objectives—any further consolidation of Xi’s power could have consequences for the world’s No. 2 economy that last a lot longer than just the next five years.

Author: Chris Anstey, Bloomberg

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