Xi Jinping has become the most powerful Chinese leader since Mao Zedong. Time will tell whether this is a good or bad thing for the economy.
Chinese leaders gathered last week for the 19th Party Congress, a five-yearly plenum that sees the leadership of the Communist Party reshuffled, and economic and policy priorities outlined.
Three very significant changes occurred at the top of the Chinese Communist Party.
First, Xi was able to stack China’s top leadership group with close allies. At least three of the appointees to the seven-person Politburo Standing Committee that governs China – Zhao Leji, Wang Huning and Li Zhanshu – are part of Xi’s inner circle.
Xi is only the second leader, after Mao, to have his name put into the constitution while still in power.
Second, “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” was formally enshrined into the Party constitution. This is symbolically important, because Xi is only the second leader, after Mao, to have his name put into the constitution while still in power. The content of Xi Jinping Thought – balanced growth, industrial innovation, the rule of law, and a more active role in international affairs – is also significant. It suggests that China could push “Socialism with Chinese Characteristics” as a unique development model which other countries can emulate as an alternative to the Western model of capitalism plus liberal democracy.
Third, Xi has left the door open to staying in power beyond 2022, when his second five-year term would normally expire. Every member of the Politburo Standing Committee will be ineligible to serve two terms as a future President if the conventional retirement age of 67 for Communist Party officials is observed. That means that there is no obvious successor-in-waiting who could take over from Xi, and may hint that he intends to stay on well into the next decade.
What do these important political developments mean for the economic outlook?
Our ‘nowcast’ of Chinese economic activity – which aggregates a broad range of up-to-date data series to get a better read on the economy than the widely-mistrusted GDP figures – appears to be coming off the boil of late, suggesting that the economy is set to slow. Meanwhile, the outgoing governor of the People’s Bank of China, Zhou Xiaochuan, has recently warned of a potential ‘Minsky moment’ in China, when rapid credit growth could quickly turn around, bringing the economy down with it.
These risks are well-known, and in our opinion a Chinese hard landing is not imminent. But Xi did little at the 19th Party Congress to advance the economic reform agenda that would put China on a more sustainable longer-term growth path. He did mention a need to focus on the quality rather than the speed of growth. And he said that “houses are meant for people to live in, not for speculation”. But he also reiterated the pledge to build a “moderately prosperous society” by 2020, which means sticking with aggressive growth targets for the next few years. And he wants to “make state firms strong and big” and to “guard against the loss of state assets”. That should lower hopes of a market-led shake-up of the state sector in Xi’s second term.
It’s been 25 years since China became a middle income country. Many countries get stuck at the middle income level as their wage competitiveness declines and growth slows. The next five years will be crucial if China is to escape this middle income trap. We happen to think that China’s chances are decent – but it is not obvious whether Xi’s consolidation of power helps or hinders the process.
The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 27th October 2017