The handover from the current (fourth) leadership generation under Chinese Communist Party (CCP) General Secretary Hu Jintao to the next (fifth) generation of leaders in 2012 will have economic consequences. Policies for future development have been set, but new leaders will bring changes of perspective and conflicts of interest that will shape economic outcomes.
Impact
- Weakened central political control will complicate decision-making.
- The policy environment will become less predictable for foreign companies operating in China.
- Key issues such as exchange rate and interest rate reforms could be compromised by differences of leadership approach.
What next
Authority and influence will be more widely dispersed after 2012, complicating how consensus is reached as policy thinking pulls different ways and political figures align on conflicting positions. This could affect China's commitment to change its growth model away from investment and towards consumption, and the pace at which this can happen. Politics will decide economic policy as China's new leaders steer through changing complexities in 2012-22.
Analysis
The change of CCP leadership in late 2012 will shift the balance of power. The historical trend is towards ever more decentralised authority at the apex:
- No single leader since Deng Xiaoping has held near-absolute power; Jiang Zemin was described in his day as at the 'core' of the third generation leadership; leadership is even more collective under Hu Jintao.
- Xi Jinping will command less personal authority than Hu when, as is still expected, he takes over in 2012. An even wider group of political actors in the Politburo and CCP Central Committee will assume greater importance in decision-making.
- Some retired leaders will continue to exercise behind-the-scenes influence after 2012. Hu, in particular, will want fourth generation legacies respected.
The dilution of authority should not be exaggerated: the political system remains centralised and ultimate authority resides in a CCP that is structured hierarchically. Yet where senior figures once derived their authority from personal stature as much as from any office they occupied, the reverse is now true.
The decentralisation of power at the highest level suggests ever looser control over the provinces and lower authorities, and potentially fractious alignments up and down the channels of authority. Xi Jinping may find it harder to outflank resistance to central policy in the way that a Hu-led CCP, for example, reined in wayward Shanghai party secretary Chen Liangyu in 2006.
Economic experience
The balance of qualifications and career experience in the current Politburo of 25 -- and even more the nine-man Politburo Standing Committee (PSC) -- is very political and not very economic. The level of economic expertise will be higher after 2012. However, different political leaders will have personal takes on the economy and how it should now be shaped to meet development objectives:
- The career route for some earmarked for high office has been via developed, industrial and internationally more open provinces.
- Others have served in less developed provinces, and their priorities for China as a whole may differ.
A highly competent and proficient apparatus -- the government/bureaucracy -- has steered China's transformation into the world's second most important economy, and is linked politically to the PSC through Premier Wen Jiabao, and more recently 'premier-in-training' Li Keqiang. The economic grounding of the PSC would be enhanced by promotion of individuals such as vice-premier Wang Qishan, Chongqing party secretary Bo Xilai, Guangdong party secretary Wang Yang and even head of the CCP Organisation Department Li Yuanchao.
- Wang Qishan's background includes roles in economics, finance and rural development, and he heads up the Chinese side on the economy at the China-US Strategic & Economic Dialogue.
- Bo has served as minister of commerce.
- Besides leading China's most economically 'progressive' province, Wang Yang has been a vice-minister of the National Development and Reform Commission.
- Li rose through the political ranks in Jiangsu, one of the more developed east coast regions.
Xi's political ascent in eastern coastal areas contrasts with Hu's experience in more backward, interior regions.
Policy impact
Nevertheless, politics will decide China's economic direction, with economics subordinated to the CCP's political imperatives. Political interests and policy outlooks differ, as they have differed in the past, but now among a wider group of people with a greater equivalence of influence in the paramount policy-making and decision-making process. Fundamental ideological differences could become more acute, for example, between capitalist/market modernisation and more redistributive policy that favours the disadvantaged over the narrower and privileged social class that has prospered over the past 20 years.
Tensions here could manifest in the development model set out by the fourth generation leadership, articulated most comprehensively in the 12th Five Year Programme (2011-15). At stake will be the commitment to the much-needed shift in macro-economic emphasis from investment and exports to consumption, but also, for example, the balance of trust in market adjustments and the inclination towards continuing administrative control over the economy. Internal politics will affect a range of issues from inflation and renminbi convertibility to the easing of capital restrictions, liberalisation of interest rates and the build-up and placement of foreign exchange reserves.
Two areas illustrate this:
- The exchange rate. The renminbi should continue to strengthen, boosting importers and supporting the government agenda for consumption to drive growth. Exporters will lose out, which may be tolerable in more developed parts of China looking to change their local development models to move out of labour-intensive processing into higher-value manufacturing and services, and cushioned by rising productivity. However, processing industries chasing lower wages by moving inland will lose the advantage the coastal regions had of an exchange rate regime that held down the renminbi. Policy now favours a stronger, internationalised renminbi.
As members of the Hu-led PSC, Xi and Li will have signed off on current policy. However, pressure could build from the interior and less advanced regions from 2012 for policy to incline their way. If not, they will want some other payoff from the centre.
- Interest rates. Interests rates should rise if the economy is to rebalance and distortions arising from the mispricing of credit correct. The state sector, generally considered a relatively inefficient user of capital, would lose out; the private sector, taken to be a more efficient user of capital and more market-responsive, would benefit. However, the state sector is tied into the party and the party into the state sector, giving state-owned enterprises a critical advantage over private sector companies. Lobbying by state interests will continue to win policy favour.
Similarly, consumers win where interest income rises but banks lose as they pay higher interest to savers and the risk of non-performing loans rises. Consumers may have policy rhetoric on their side but they lack adequate representation in the party, where the state corporations, including the banks, have all the muscle and connections.
