Xi Jinping’s big coronation as China’s longest-serving leader since Mao Zedong is suddenly going a bit closer to plan.
Three months ago, a cratering economy, massive protests over “zero Covid” lockdowns and fears Xi’s tech crackdown isn’t over had capital fleeing China.
At the time, many foreign investors figured next week’s National People’s Congress would be more of a crisis-management session than a moment to pop champagne corks.
But the bubbly is back. As Xi formally secures a norm-busting third term, China’s reopening is reviving economic growth and dispelling any lingering whiff of panic in the air. Just as important, Xi is about to turn Asia’s biggest economy over to a new reform team.
The hope is that new Premier Li Qiang will have greater latitude to deliver “deepening structural reform” in the financial sector and in recalibrating economic engines. One challenge outgoing Premier Li Keqiang never addressed: how to build social safety nets sufficient to prod 1.4 billion people to save less and spend more.
This herculean task now falls to Li Qiang, whom Xi worked with in the 2000s as governor of Zhejiang province and is thought to be “pro-innovation.” Also, unlike Li Keqiang and outgoing Vice Premier Liu He, Li Qiang may have Xi’s full confidence to shake up the economy in epochal ways.
Xi now has an ideal chance to prove the skeptics wrong. Or not.
The problem is, only Xi knows what is in store for his third act as Chinese Communist Party leader. Or how much rope he’ll give deputies to disrupt China Inc. Some of the signals from recent weeks aren’t exactly promising.
Despite reassurances from Li Keqiang and Liu He that Beijing would end its crackdowns on tech and the private sector, Xi seems to be reading from a different script. The recent disappearance of billionaire technology dealmaker Bao Fan, CEO of China Renaissance Holdings, raised fresh questions in global market circles.
In telegraphing reform plans, Xi indicated that the party will exert greater influence within private companies and boost control over science and technology.
What’s more, Xi suggests the government overhaul to be unveiled at the NPC, which begins Sunday, means “relatively intensified” changes to how state agencies and the party interact with key industries and sectors.
“Although we don’t know the specifics, we are sure that the new restructuring plan will have the party taking over policymaking power from state institutions,” analysts at the research firm Trivium China write in a report.
What is clear is that boosting consumption to return to pre-pandemic levels and of 5%-plus economic growth is Xi’s top goal next week. “Fiscal policy will ramp up,” including an expansionary budget deficit that rises to 3.2% of gross domestic product (GDP), says HSBC chief China economist Jing Liu.
The good news for Xi – and one reason the champagne is back in the room – is that the latest data point to a rebound in domestic demand.
Mainland factory activity returned to expansion territory in February. The official manufacturing purchasing managers’ index jumped to 52.6, above the 50-point mark denoting expansion.
It’s the highest reading since 2012, just as Xi was preparing to assume power. The non-manufacturing PMI hit 56.3 in February amid improvement in construction and services activity.
“The strong PMI confirms the economic recovery is on track,” says economist Zhiwei Zhang at Pinpoint Asset Management. “The strong rebound of domestic demand may lead to inflationary pressure in the next few months, but I don’t expect it to be a persistent problem.”
Economist Iris Pang at ING Bank thinks recent data give Xi’s government valid reasons to set a high growth target of 5.5% to 6%. There’s far less clarity, though, about how Xi’s new term might address structural impediments to a freer and more competitive economy.
All this is exacerbating concerns among foreign investors. The basic worry: a government of close loyalists is good for Xi in the short run, but perhaps bad for creating the entrepreneurial and transparent economy on which investors are betting.
For now, overseas investors are perplexed.
“Saying is one thing, and doing is another,” notes economist Aidan Yao at AXA Investment Managers. “Delivering the right speech at the 19th Party Congress [in 2017], which covered many of the same development objectives, did not guarantee market-friendly actions over the past five years.” Or going forward, for that matter.
At next week’s NPC, “market participants will seek confirmation of a light-touch approach to, if not downright easing of, regulatory restrictions in the property and tech sectors — crucial for reviving business confidence,” says strategist Aninda Mitra at BNY Mellon Investment Management.
In the minds of foreign investors, notes economist Carlos Casanova, at Union Bancaire Privée, it’s vital that the NPC provides transparent plans for the next generation of investment-friendly sectors, namely tech, services and renewable energy, even as Beijing tightens government control.
On the one hand, says analyst Lauren Gloudeman at Eurasia Group, “Xi appears committed in the long term to a political agenda that features ideological control, economic statism and assertive diplomacy.”
On the other, Gloudeman adds, “he exhibits more tactical flexibility when it comes to how the party should advance this strategic agenda.” Xi’s recent speech at the Central Party School stressed a “willingness to dial up and down different policy measures to serve his overarching political goals,” she explains.
Xi urged localities and departments “to encourage bold exploration and daring pioneering” in finding policy solutions.
He said that “advancing Chinese-style modernization is a systemic project” that must “correctly handle a series of major relationships such as those between top-level design and practical exploration, strategy and tactics, principles and innovation, efficiency and fairness, dynamism and order, and self-reliance and foreign opening.”
But Xi has yet to explain how these policies can coexist with his desire for even greater top-level control. Xi’s party, for example, is considering resurrecting the long-disbanded Central Financial Work Commission. This would increase Xi’s power over financial system decision-making, and that of his preferred replacement for Liu He as vice premier, He Lifeng.
Xi and He Lifeng know each other from the president’s time in Fujian province, where He was Xi’s protege. It’s expected that He would be appointed as the powerful party secretary of the People’s Bank of China, the central bank. This would make He the first vice premier to be given that status since the 1990s.
That alone might unnerve global investors clamoring for more, not less, central bank independence. But so might Xi’s new team prioritizing the party’s short-to-intermediate-term political priorities over where China’s economy might find itself a decade from now.
In recent years, Liu He, chief financial regulator Guo Shuqing and PBOC Governor Yi Gang pushed a deleveraging policy to reduce property bubbles and local government debt levels.
As many of China’s most high-profile policymakers head for the exits, their replacements “mostly lack such a background and are likely to take a somewhat different approach,” predicts economist Wei He at Gavekal Dragonomics.
“In particular,” he adds, “the coming reshuffle of policymakers is likely to reinforce the current shift away from the strict financial-discipline agenda of the past five years.”
Liu is widely credited as the architect of the “supply-side structural reform” push launched in 2015 to reduce industrial capacity, property inventory and leverage. The financial de-risking campaign that started in 2017 was spearheaded by Liu, Guo and Yi. It made important progress in reining in the sprawling shadow-bank system.
“Those initiatives,” Wei says, “shared an overarching aim to prevent a looming financial crisis from derailing China’s economic rise.”
Yet, global investors will just have to await and see. Among the top candidates for next finance minister: Lu Zhiyuan, former senior official in Xi’s native Shaanxi province and party head in the coastal city Qingdao.
Among those mentioned to replace Guo as banking regulator is securities regulator Yi Huiman. Zhu Hexin, chair of Citic Group, a state-owned conglomerate, is widely tipped to replace Yi as PBOC leader.
Even so, there are certain laws of gravity that still apply to economies transitioning from state-driven and export-led growth to services, innovation and domestic consumption.
One of those laws states that developing economies should build stable, transparent and trusted markets before trillions of dollars of outside capital flood the system.
This means regulators should steadily increase transparency, ensure companies raise their corporate governance games, craft reliable surveillance mechanisms – like reliable credit rating players – and strengthen the plumbing of the system before the world shows up.
In this kind of environment, an aggressive and unfettered media is an ally in policing inefficiencies and malfeasances that hurt investor trust.
On Xi’s watch, China has in many ways become more of a black box – certainly in terms of press freedom, or the ability of a programmer in Shenzhen or an art student in Beijing to use unfiltered internet search engines effectively.
And this is a major blemish on Xi’s first decade in power. Xi has tended to go in the other direction.
The belief is that China can build a world-class financial system after waves of foreign capital arrive. That means less regulatory volatility and fewer controversies like the late 2020 downfall of Alibaba Group founder Jack Ma.
“The NPC could provide further details on fiscal easing, favoring infrastructure- and consumer-related stocks,” SocGen strategists wrote. “We believe greater conviction that the equity market has troughed is only likely to come from a more stable regulatory environment.”
Next week, Xi now has a wide-open window of opportunity to unleash the supply-side boom he’s been promising — and with a new team to reset the economic clock. Only Xi knows whether these hopes will be realized.
Follow William Pesek on Twitter at @WilliamPesek