Xi’s slogan is “the China dream”. What to watch for in The Great Hall of the People today. 

Doug Ferguson, Partner in Charge, Asia and International Markets
Doug Ferguson, Partner in Charge, Asia and International Markets

Today in the Great Hall of the People the most important planning and leadership transition meeting of the Chinese Communist Party takes place.

China’s Communist Party Conference is the nineteenth since its original formation in 1921.

So why is it so important?

As we know, in China there is only one political party which centrally controls the state economy, the military and society at large. There are at least 90 million communist party members and 2,300 have travelled  to Beijing from across China to participate as delegates.

The conference is secret, apart from President Xi’s opening address today.

Through this important public address, we will interpret what he, as the “core” leader of China, expects for China in the next 5 years; anticipated as promoting stability, central control and united, loyal leadership.

After the week-long meeting we will know a lot more about China’s economic plans and new leadership team and most importantly, President Xi’s tenure as General Secretary, Head of Military and President after 2022.

Given China’s economic leadership, the reliance on China for Australia’s economic future and the state of geopolitical affairs in Asia Pacific there is no disputing what is said will impact the future relations of Australia and other major trading partners with China.

President Xi is starting his second 5 year term. The first was characterised by his unrelenting crackdown on corruption, military reform and Belt & Road Initiative. From an economic perspective, we have seen China pursue (with considerable success) consumer driven, hi-tech sector growth but continuing central state control over the economy as necessary.

So what should we be watching for?

Political leadership transition

In his first term, President Xi inherited a Politburo and Poliburo Standing Committee. In his second, he will select his own of economic conservatives and political loyalists.

The conference will reveal a new 25 member Politburo drawn from 205 members of the Central Committee. These political appointments will lead to changes of key regulators and State Owned Enterprise (SOE) chiefs, so again we may be dealing with lots of new faces that may cause some disruption.

On the final day, the new Politburo Standing Committee will be unveiled, probably with seven members of which five will be new. This is the most powerful government body and appointments follow months of political decision making.

There is huge interest in who will be unveiled including whether President Xi’s most important ally, Wang Qishan, who leads the anti-corruption department and is well past the constitutional retirement age, will get an extension. This is a big moment that may indicate whether the President himself might consider a third term, in 2022, above the age of 68. At this stage, most believe this is unlikely as it is unconstitutional; although there is precedent with Mao Ze Dong.

If constitutional tradition prevails we may also see who emerges as the potential successor to President Xi. The fact that this successor may be relatively unknown shouldn’t worry us. Xi himself was relatively unknown until Hu Jintao identified him in a similar meeting in 2007.

China’s economic model for the next 5 years

President Xi wants sustainable, stable growth for China and to position China in key sectors for long term growth.

Over the past 5 years, President Xi has increasingly taken direct central planning control over the economy to ensure greater stability and to meet growth targets. He saw western economics fail in the GFC and has had to deal with some major economic challenges including the 2015 share market crash. In 2016, the devaluation of Yuan / RMB and dramatic fall in foreign currency reserves of nearly USD1 billion. Outbound investments in poorly considered and executed deals or through individuals wanting to get RMB out also saw considerable funds leaving China.

Total debt, currently estimated by western banks at 250-300 percent of GDP (GDP currently USD11 trillion 2016) leading to the first S&P downgrade in 18 years is of prime concern to President XI.  Most of this is due to excessive SOE, local and provincial government borrowing.

Central to President Xi’s economic model is:

  • merger and partial privatisation of SOEs
  • deleveraging of debt and strengthening China’s financial system
  • reducing over capacity, reducing inventory in SOEs in traditional state sectors
  • slowing capital outflows and instilling much great discipline and approval rigour to overseas investment
  • Belt and Road initiative
  • promoting advanced manufacturing, hi tech economy while fostering the consumer sector and
  • repairing the environment

All of these challenges have to be dealt with while delivering targeted GDP growth of 6.7 to 6.8 percent to continue to create jobs and wealth.

The 3rd Quarter GDP results will be announced during the conference – we don’t expect any nasty surprises.

So what does it mean for Australia?

A strong, stable and growing China is vitally important to Australia.

New capital investment from China has virtually slowed to a stop but this is consistent globally. China’s leaders were wise to tackle this surge in wasteful ODI and establish some process to ensure future success. We should see things pick up in 2018 and for now, over 500 Chinese companies in Australia are operating and re-investing.

Australia should benefit provided China can deleverage and implement SOE reform including the Belt and Road Initiative while giving private companies and consumers freedom to continue buying, travelling and educating.

President Xi, like all past presidents may only serve two terms, The constitution says he will retire and it would take a lot of political capital to extend to a third term. But China prefers and is used to a strong leader. So, it is possible and President Xi is definitely delivering his “China dream” of China’s global re-emergence and leadership.

With his power fully consolidated, we hope his reform agenda can be accelerated, but, it will be of far greater benefit to China and Chinese companies, not foreigners. We need to find a constructive way to work with China.

Beijing is in now in full lock down. Security is very tight, factories closed, migrant workers sent away, new trees and flowerbeds planted, signage everywhere with Xi’s image.

It is a very important and interesting week ahead – stay tuned.

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