China Research

Very recently, China revealed the new team that will run the country for the next five years – and gave some hints of what will happen beyond that. The top tier of the new leadership has received the most attention, but in many ways their elevation was a foregone conclusion. Xi Jinping and Li Keqiang have been tapped for the positions of President and Premier since their elevation to Vice-President and Executive Vice Premier five years ago. Indeed, they are the only members of the nine member Politburo Standing Committee who did not retire. Nor are the names of the five other additions to the now narrowed Standing Committee unexpected. Only ten of the wider twenty five member Politburo were not scheduled for retirement in 2012.

Three of the new Standing Committee members: Zhang Dejiang, Yu Zhengsheng and Liu Yunshan, are all serving their third five year term on the Politburo. Zhang Gaoli and Wang Qishan were also promoted. The three left behind were Liu Yandong, the only women on the old Politburo, Li Yuanchao and Wang Yang. Much has been made of the last two’s failure to achieve promotion because they are associated with outgoing President Hu Jintao and are seen as liberal political reformers. However, they were also the youngest on the old Politburo and are highly likely to be promoted to the standing committee in five years – when all of the five new standing committee members will retire. Thus, continuity more than politics may be central to the leadership’s promotion selections.

Just as interesting as who was promoted to the Standing Committee is who was added to the wider Politburo. Fifteen of the twenty five slots were open due to retirement – and in the case of Bo Xilai expulsion. Nine of these new selections will also be of retirement age in 2017, meaning that of the just selected Politburo only ten will be available for promotion to the next Standing Committee. Whether the Standing Committee in 2017 is seven or nine, the list is already pretty well set – showing that stability is a key goal in designing the Politburo every five years. Two names stand out in this regard, as Hu Chunhua and Sun Zhengcai are the only two selected this term who will be young enough to continue in ten years. Hu Chunhua, in particular, has long been tapped for promotion as he was leader of the China Youth League, like Hu Jintao. Indeed, their careers are so alike and Hu Jintao’s mentoring of Hu Chunhua so strong that the younger man is called Little Hu.

Several elements of the new leadership point in the direction of increased financial and economic reform, but political reform not so much. First, all of the new Standing Committee members are considered conservative on political issues. However, even the “reformers” left of this year’s list are hardly liberal by US standards. Americans often look for a trend toward democracy which does not exist in China. Yes, there are always some protests, particularly in Hong Kong, but most are over local issues in townships, not directed at the central leadership. Looking for politically liberal Politburo members in China is like looking for moderate clerics in Iran – on an American spectrum there are only shades of conservative.

A shift toward financial and economic reform is likely as there will be significant change at the top of the financial leadership. Many well-known names like Zhou Xiaochuan (Governor of the People’s Bank of China), Chen Deming (Minister of Commerce), Xie Xuren (Minister of Finance) and Zhang Ping (Chairman of the National Development and Reform Commission) will all be replaced due to retirement. Many see the hand of 86 year old former President Jiang Zemin in the design of the current leadership. This is re-emphasized by the fact that current President Hu Jintao will also give up his leadership of the military, something Jiang held onto for two years after he stepped aside as President ten years ago.

Jiang’s Shanghai clique had been aggressive in exploiting paramount leader Deng Xiaoping’s message that it is good to be rich. However, under the Hu and Wen leadership of the past decade, much more attention was given to development of the interior and the West, state owned enterprises were more favored, and the more market oriented east coast provinces saw some of their luster dim. The downfall of Bo Xilai and the massive concentration of wealth that occurred during this period has undermined the Party and there is a backlash underway. Wang Qishan, known as a top notch problem solver, has been named the head of Party discipline, rather than to a financial post. Three of the five new members of the Standing Committee took their most recent positions to clean up after a corruption scandal. It looks like there is a new sheriff in town. Even in China, the drift is toward more regulation.

Much has been made of the competition between the Princelings and the China Youth League (Tuanpai) coalitions within the Party, but as we have commented before this is largely a function of education. Most of the new leadership was born between 1945 and 1955, meaning they went to college when very few received higher education due to the Cultural Revolution. One either had to be politically connected (the Princelings) or well regarded by the internal promotion ladder in the Party (the China Youth League). Yet, nearly half of the new twenty five Politburo members have advanced degrees, and both leaders have Ph.D.s – Xi in law and Li in economics. The only US President with a Ph.D. was Woodrow Wilson.

Unlike, their predecessors whose education was primarily in engineering (at Soviet style institutions) the majority of the new group are trained in law, economics and management – reflecting the Party’s understanding immediately after the Cultural Revolution that these were skills that were in high demand. Four of the seven Standing Committee leaders were sent to work in the countryside as educated youths – including two of the Princelings and both leaders. This group has a much different view of the world if only because they came of age during a time where strong Chinese growth was a permanent feature. They are now tasked with fostering that growth into a new era where due to sheer size and changing demographics, growth will slow. The question is by how much and what are the consequences for debt and income distribution as a result.

As the most likely locomotive of world growth, the decisions of this new group may be far more important than what the US does on the fiscal cliff or Europe does with fiscal integration.

Michael Drury
Chief Economist, McVean Trading & Investments