Major Chinese leadership transition puts reforms on hold

The 18th Chinese Communist Party National Congress scheduled for October or November will replace a large percentage of its top leadership. The only two members expected to retain their seats on the Politburo (and therefore regarded as the most important players in the political race) are Xi Jinping and Li Keqiang. Xi is expected to assume the most powerful political position in China as General Secretary of the Communist Party and President while Li becomes Premier. The leadership changeover will put major reforms on hold with politicians seeking more senior positions in the political hierarchy wanting to avoid controversial decisions, and those leaving office wishing to do so with their legacy intact. Little is known about how future economic policy will be affected but future reforms are expected to aim for slower but more balanced growth.
MAJOR CHINESE LEADERSHIP TURNOVER. The 18 Chinese Communist Party National Congress scheduled for this autumn will replace around two thirds of Chinas top leadership; an unprecedented percentage. The transition takes place during a period of profound change in Chinese society. There are signs of an escalation in popular demands for reform of the political system at the same time as it is becoming increasingly obvious that Chinas current growth model is unsustainable. The countrys emergence as an economic superpower also implies that the leadership changeover and any resulting policy changes will have a strong impact also beyond Chinas borders. THE COMMUNIST PARTY NATIONAL CONGRESS. The Communist Party of China (CPC) currently has around 80 million members representing just over 5 per cent of the total population. Every five years, usually in October or November, the Party organises a National Congress whose purpose it is to announce new directions for ideology and elect the Partys 370-member Central
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Committee representing the whole party. In turn, the Central Committee appoints the 25-member Politburo within which power is centralised in the nine-member Politburo Standing Committee. The members of the Standing Committee are ranked in order of primacy with the most senior also assuming the role of Secretary General of the Communist Party, a post currently held by Hu Jintao. The nine members of the Politburo Standing Committee make the important political decisions in China. Seven of its nine members are expected to be replaced this autumn. THE LEADERSHIP TRANSITION PUTS REFORMS ON HOLD. Both politicians stepping down and those seeking promotion within the political hierarchy will be unwilling to initiate reforms ahead of the Congress, preferring instead to avoid any controversy which may harm their chances, while politicians leaving office will wish to preserve their legacy intact. Corroborating this view, no major policy initiatives were presented at the recent annual National Peoples Congress. In short, no major policy initiatives or political reforms are expected until the leadership transition has been completed and new Politburo members are properly established in office. Consequently, any major reforms will remain on hold well into 2013 and possibly longer. As far as economic policy is concerned, monetary policy is expected to be eased gradually while fiscal policy is likely to become more expansionary. EXPECTED POLITICAL POSITION CHANGES. The process of filling political positions is secret with contests among political rivals mainly taking place behind closed doors. However, media coverage of Bo Xilai, a contender for a seat on the Politburo Standing Committee, indicates that the medias importance is growing and that it is becoming increasingly difficult to maintain secrecy. Mr Bo recently lost his position as Communist party secretary of the Chongqing municipality; probably ending his official career and candidacy for the ninemember Politburo Standing Committee. Mr Bos fierce crackdown on organised crime and some of his other activities in Chongqing was called into question and has been covered by the media. Still, the governments aim
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Economic Insights

to restrict news of political rivalries underlines the fact that predicting the upcoming political succession is a highly speculative task. However, it is widely known that the two most important players on the current political scene are Xi Jinping and Li Keqiang; both of whom are already members of the Politburo Standing Committee. Xi is expected to replace Hu Jintao as General Secretary in autumn 2012 and as President in March 2013. Li will replace Wen Jiabao as Premier. A semi-official retirement age of 68 years means that the remaining seven members of the Standing Committee are expected to be replaced by members of the larger Politburo.

economic policy has begun to refocus increasingly on objectives supported by the popular faction, a development reinforced by the latest five-year plan. In our opinion, this is the direction China needs to take to avoid becoming stuck in the middle income trap. The leadership transition is not expected to result in any radical changes of economic policy; future reforms will aim to achieve slower but more balanced growth less driven by investments and exports and more by consumer demand. POLITICAL REFORMS WILL PROCEED SLOWLY. Statements by Wen Jiabao, the current Premier, about the need for political reforms is a sign that a debate is taking place amongst the most senior hierarchy of the Communist Party concerning the type of political system required to govern China. Chinese intellectuals appear divided on many political and ideological issues. Experiments have focused on intraparty democracy at local village level including increasing consultation with citizens. The objective appears to be to make the Partys processes more predictable and transparent. We expect any changes to the Chinese political system to be gradual and consensus based. Little is known about Xi and Lis political visions or how they will handle international relations. Xis recent visit to the US attracted a lot of media attention but did little to reveal his political inclinations. However, the new leadership will clearly face increasing demands for political reform. Andreas Johnson SEB Economic Research + 46 73 523 77 25 andreas.johnson@seb.se

Xi Jinping (left) and Li Keqiang

ECONOMIC POLICY CHANGES WILL TARGET MORE BALANCED DEVELOPMENT. The difficulty in predicting political position changes implies that it is even harder to forecast potential policy shifts. Despite the abundance of background information on both, Xi and Li have revealed little about how they will try to influence future economic policy. However, some insight into their views can be gained by examining their association with Chinas two main political movements. Two main factions exist within the Communist Party. The elitist faction argues for rapid economic growth and a continuation of the current model of capital intensive, investment-driven growth. It favours Chinas growing capitalist and middle classes and has strong support among industrial leaders. The popular faction advocates slower, more gradual growth and more balanced economic development. It wishes to mitigate rising inequality and improve living conditions in rural areas. Xi is associated with the elitist faction and Li with its popular counterpart, with both factions approximately equally represented in the Politburo. The upcoming leadership transition is not expected to fundamentally alter the balance between the factions. Furthermore, differences between them should not be exaggerated, concerning as they do the extent and rate of reform rather substantive divergences of opinion. Policy changes have often been a compromise between the two sides which have tended to divide political appointments among themselves, a situation which is expected to continue. However, in recent years