When President Xi first gained the position of President of China five years ago there was considerable western enthusiasm. He came across as a keen reformer willing to push on with China’s enterprise revolution. He wanted to open China’s markets more to the west, to liberalise foreign exchange, privatise more industry and even introduce more democracy into local government. Partly western-educated, an accomplished politician and diplomat, there were high expectations.
Five years on President Xi is a powerful figure. Speaking in the Hall of the People, he can rightly draw attention to five years of success in growing the economy, lifting people out of poverty, and modernising China. His speech confirmed the big themes of his period in office.
He wishes to continue with his purge of corrupt officials. Worth doing for its own sake, it also enables him to strengthen his hold on the bureaucracy, creating plenty of vacancies for his supporters and ridding him of badly behaved opponents. For delegates to this Congress, the press says it meant no free fruit in their hotel rooms, no large displays of flowers in foyer, no free haircuts and beauty treatments as at past events. Their President stresses his simple lifestyle. He is keen to stop officialdom living high on the hog at the expense of the state.
It seems likely that this powerful government will continue to manage capitalism in its own way
He emphasises the importance of China’s territorial integrity, reminding Hong Kong and Taiwan of their place in the Chinese firmament. He talks up the advantages of the new Silk Road, the belt and road strategy for China investing across Asia and the Middle East and extending its trading influences. He promises a cleaner “more beautiful” China, conscious that public opinion is restless about dirty air and dirty water. He is still leading the move for China to rely less for its growth on exporting industrial products and more on supplying goods and services they can afford to buy for themselves.
The speech said enough to reassure western markets. He offers more liberalisation of the exchange rate, which offers something to Mr Trump who used to think China a trade cheat by currency manipulation. He seeks more growth, offers help to smaller enterprises, and proposes a continuation of a mixed economy where the private sector can play its part. He suggests foreign investors and traders can come to enjoy a bigger role in China’s development.
There is another side to the Chinese story that represents a very different system to western democratic capitalism. Mr Xi sees unbridled democratic debate, public disagreement, elections that throw leaders out of power in unplanned ways as weaknesses that China cannot afford. He is now laying great emphasis on unity, on the important role of the Communist party in a single party state, and the need to make good use of the public sector as part of China’s development. He is out to build a large military capability that will enable China to operate outside its own region as the US can currently do. He sees China as being the equal of the US militarily by 2050. He has no time for letting parts of greater China drift to greater independence. There will be no referendums over their future in the way the UK did over Scotland. He has no intention of ending up where Spain has over Catalonia. China will continue with strict controls over the internet and social media. Messages will be remorselessly positive about keeping China together and building a greater China. There will be limits on what is an acceptable political view.
So does this make any difference to the investment outlook? Chinese shares have done well this year, but they are still not dear by world standards. It seems likely that this powerful government will continue to manage capitalism in its own way, and continue to regard a more open democratic politics as a weakness to avoid. China’s reforms will go so far to ensure continued economic growth, and to ensure a better quality of life as well as higher incomes and more goods for Chinese consumers. This should be sufficient to sustain investment interest in what remains a remarkable economic growth story so far.
An irony rests in this paradox. China cannot press on with its economic success story without the buy-in of the people. The single party state has to remain very alert to public opinion. It has to respond to worries about jobs or a bad environment or income levels with positive action. For the time being this works in a positive direction, delivering more consumer and green led growth. The richer China becomes, the less successful censorship will be as a means of controlling people and events. Japan in the last century discovered that the US system based on a freedom that seemed like anarchy to Asian eyes was better equipped to create and ride the digital wave. China has to see how it can match US innovation and media dominance with a different model.
The above article was first published by Charles Stanley on 20th October 2017