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The National Party Congress will leave the Chinese President more powerful than ever before. What does this mean for China – and the world?
In October, the Great Hall of the People on Tiananmen Square will host the National Congress of the Communist Party, a meeting held every five years to reshuffle the higher-ups in the Chinese government.
For all the pomp, the Congress is a glorified rubber-stamping exercise. The real political work takes place in the months leading up to the event, at Zhongnanhai, a secluded compound located a few hundred yards north of the Great Hall. Here, in government buildings set amid tranquil gardens, President Xi Jinping has been honing his team in preparation for his second five-year term, promoting allies and casting rivals into political oblivion.
After the Congress is finished and Xi’s decisions are given the imprimatur of the top party committees, the president will emerge with more power than any Chinese leader since Chairman Mao. But will he take advantage of his strengthened position to push for reform, or continue to tighten the government’s grip on the economy? And how will his approach to foreign policy shape China’s relationship with the wider world?
After he became president in 2013, Xi initially presented himself as a Deng Xiaoping-style reformer. That year, the Third Party Plenum – a meeting of the Communist Party’s Central Committee – laid out an ambitious policy agenda dubbed ‘Reform 2.0’ in the state media, a deliberate allusion to Deng’s original round of reforms in the 1980s. It pledged to allow market forces to play a ‘decisive role’ in the economy and to encourage the development of non-public sectors. The intention was clear: to rebalance the economy away from state-led, debt-fuelled investment towards a more consumer-driven growth model.1
However, this reform programme took a back seat over the next few years as Xi set about centralising political power – mainly through a massive anti-corruption drive – and prioritising vigorous, state-led growth. He signalled his intention to fulfil his predecessor Hu Jintao’s pledge to double the size of the economy between 2010 and 2020, unleashing massive fiscal stimulus packages whenever growth looked set to slip below its target of 6-7 per cent. The question now is whether Xi will belatedly attend to the Third Plenum plan once the autumn conference is concluded.
“I think we can all agree that Xi will emerge from the Party Congress with more political capital,” says Evan Medeiros, Asia director at Eurasia Group and former special assistant to President Obama at the White House's National Security Council (NSC). “Top of Xi’s agenda is economic management. And I use the term ‘management’ very deliberately. It doesn’t mean a full complete embrace of the Third Plenum programme. It will basically be a mix of embracing supply-side structural reforms while also using the state, especially when it comes to industrial policy.”
The great rebalancing
Xi’s revamped administration faces several serious challenges; it will need to tackle an enormous debt mountain, reform sluggish state-owned enterprises and spur consumer demand if it is to successfully rebalance the economy.
Until now, China’s growth model has been based on channelling resources through local-government infrastructure investment, which ramped up debt, enabled corruption and enriched local elites. If China is to effect a shift towards consumer-led growth, it will need strong leadership to tackle these vested interests and redistribute wealth to households.
After the National Congress enshrines his position as China’s ‘core leader’, Xi will be well-placed to deliver such redistribution and advance the agenda of the Third Plenum, according to Michael Pettis, professor of finance at Peking University in Beijing.
“Back in 2009, before Xi became president, I wrote down what would be the optimal process for economic rebalancing and adjustment in China, and item number one on the list was that the next president would have to centralise power dramatically. It seems to me Beijing understands it has to centralise power in order to implement reform,” Pettis says.
Whether Xi will use his power to implement economic rebalancing, or merely to further his own political interests, remains to be seen. Both Pettis and Medeiros believe that, for at least the next five years, China will continue promoting the consumer economy and bolstering the political strength of the centralised Party state while resisting deeper market or political reforms.
Trade and development
As Xi cements his power at home, China’s foreign policy is likely to be geared around three main themes: trade, development and security. US President Donald Trump’s cancellation of the Trans-Pacific Partnership (TPP) in January has provided China with an opening to assume economic leadership in the Asia-Pacific region and Xi has been touting a separate trade deal, the Regional Comprehensive Economic Partnership (RCEP). Many of TPP’s intended members, including Australia and Japan, are now in talks to join.
The centrepiece of China’s overseas development efforts is the Belt and Road initiative (formerly ‘One Belt, One Road’, or OBOR). It is a mind-bogglingly vast project, or series of projects, that encompasses two main trade routes: the ‘belt’, which loosely follows the ancient Silk Road through central Asia, and the ‘road’, a string of maritime connections between Southeast Asia, South Asia and East Africa.
Belt and Road comprises 65 countries, accounting for 29 per cent of global output and 63 per cent of the world’s population. Progress has been slow but is now picking up, especially in two key parts of the network: the China-Pakistan Economic Corridor, a $50 billion series of infrastructure and agriculture projects that connects landlocked provinces in Western China to the Arabian Sea, and the New Eurasian Land Bridge, which takes in roads and railway lines linking China and Europe.
“Outbound direct investment can be seen as a starting point for China increasing its involvement with the global economy,” says Will Ballard, Head of Emerging Markets and Asia Pacific Equities at Aviva Investors. “Investment is being focused on developing countries; for instance, setting up shared manufacturing facilities.”
China will not allow unlimited investment abroad. Concerned about rising debt, Beijing has tightened outbound capital controls and clamped down on foreign deals among China’s more-acquisitive conglomerates in recent months. In August, China’s State Council outlined new rules to restrict “irrational” overseas investments, but said it would continue to encourage Chinese firms to invest in Belt and Road projects, particularly in sectors such as agriculture and high-tech manufacturing.2
Security is the third plank of China’s foreign-policy agenda. Many countries in Asia have become concerned over the country’s growing militarism. Under Xi, China has vociferously pressed its sovereignty of the Senkaku Islands (known in China as Diaoyu), a set of rocky outcrops currently controlled by Japan, and made a show of displeasure over Trump’s contact with Taiwan’s president Tsai Ing-wen in November 2016, which broke with US adherence to the ‘One China’ protocol.
Most notably, China has sought control over trade routes in the South China Sea, to which it believes it has historic claims. China has been building artificial islands in waters also claimed by Brunei, Malaysia, the Philippines and Vietnam. Nevertheless, the risk of a confrontation between China and the US or its allies has “fallen significantly in 2017”, says Medeiros. Tensions were inflamed in July 2016 when a tribunal at The Hague ruled in favour of the Philippines, which had brought a case against China’s island-building activity, but Filipino President Rodrigo Duterte has been mostly silent on the issue since a state visit to Beijing in November last year, when the two countries signed trade deals worth $13.5 billion.3
This shows China is more likely to rely on economic diplomacy rather than military might to settle disputes. And it is economic means that might yet prove decisive in defusing the region’s most pressing security threat: the volatile nuclear-armed regime in North Korea. In August, China signalled its growing impatience with Kim Jong Un by supporting US economic sanctions against Pyongyang.
The new hegemon?
While China is enjoying increasing influence through its economic and military prowess, there are limits to its ambitions. Unlike the US, China has little desire to become embroiled in conflicts that have no direct bearing on its domestic security or overseas economic interests.
As a developing country, China remains hungry for raw materials to propel its growing economy. That means it will continue to prioritise trade links with economies that can provide these resources, such as those in sub-Saharan Africa, rather than seeking increasing influence at the diplomatic top table. Ballard notes the composition of China’s trade is still starkly different from that of the US. “China is a big country, but remains a poor one. And that shapes its demand,” he says.
Nevertheless, the composition of China’s trade will shift as it makes the transition towards consumer-led growth. And although China will not supplant the US as global hegemon any time soon, it looks set to greatly expand its regional influence through Belt and Road and RCEP. Over the longer term, the trade and infrastructure links it is forging may pay handsome economic and political dividends.
At home and abroad, the fate of China rests largely with Xi Jinping and his inner circle. Xi wields immense power, and whether he uses it to drive reform or to cement his own position, the implications will be felt far beyond China’s borders. When the president takes to the podium to address the gathered cadres at the Great Hall of the People, the eyes of China, and the world, will be on him.
1. See ‘The party’s new blueprint,’ The Economist, November 2013
2. ‘China to curb “irrational” overseas Belt and Road investment: state planner,’ Reuters, August 2017.
3. ‘Philippines’ Duterte backs ‘new order’ led by China and Russia,’ Financial Times, November 2016
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Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at September 5, 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
Managing director for Asia at Eurasia Group. He was previously assistant to the president and senior director for Asian affairs at the White House's National Security Council (NSC). In that role, Medeiros served as President Barack Obama's top advisor on the Asia-Pacific and was responsible for coordinating US policy towards the Asia-Pacific across the areas of diplomacy, defense policy, economic policy, and intelligence affairs.
Nonresident senior fellow in the Carnegie Asia Program based in Beijing. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
This is an edited version of an article in AIQ, Aviva Investors’ quarterly publication on the biggest themes in the global investment markets.