China - 19th Party Congress: Key Implications

In this article, we identify six key implications of China's 19th National Congress of the Communist Party of China (NCCPC). In our view, the anti-corruption campaign that has been taking place since 2012 will continue as the Communist Party of China (CPC) aims to enhance party discipline over the coming years, even as the country's anticorruption tsar Wang Qishan is set to retire from the Politburo Standing Committee (PSC). During the 19th NCCPC, President Xi Jinping is likely to be able to secure positions for his allies, and the political recentralisation of the government will bode well for reforms over the coming years. Meanwhile, as China becomes more powerful, it will look to increase its sphere of influence through its military and the creation of parallel international institutions.

1) Anti-Corruption Campaign To Continue

The anti-corruption campaign, which has been in place since Xi Jinping took over in 2012, is likely to continue over the coming years. We believe that the CPC will seek to strengthen discipline across the entire party, which is likely to be positive for the business environment. Indeed, anti-corruption tsar Wang Qishan's essay in China's official newspaper and official CPC mouthpiece, the People's Daily, on July 17 indicates that the anti-corruption campaign will likely persist. Wang, who is chairman of the Central Leading Group For Inspection Work (China's anti-corruption agency) and the Central Discipline Inspection Commission (responsible for party and military discipline), stated in his write-up that the party's campaign against corruption will never end, and that it must continue following the 19th Party Congress.

However, it will likely slow compared with what was seen in the past five years, with our analysis on the number of investigations showing that the anti-corruption drive peaked in 2014. Firstly, Xi has already obtained and secured significant power and authority over the past couple of years, particularly with his appointment as one of the 'core' of the party's leadership during the sixth plenary session of the 18th CPC Central Committee held in October 2016. Secondly, while Wang is likely to act behind the scenes as a party elder with respect to reducing corruption, he would not be directly involved and, therefore, the crackdown is unlikely to be as intense, unless a key ally of his is appointed to the PSC.

1a) Will Wang Qishan Continue To Serve In The Politburo Standing Committee?

Our core view is for Wang Qishan, China's top graft buster and arguably the second-most powerful man in China, to retire from the CPC PSC in 2017 due to the party-imposed unofficial retirement age of 68 ('seven up, eight down' rule) as he is currently 69 years of age.

As chairman of the Central Leading Group For Inspection Work (China's anti-corruption agency) and the Central Discipline Inspection Commission (responsible for party and military discipline), Wang has made his anti-corruption stance very clear by cracking down significantly on graft during his five-year term.

The success of the anti-corruption drive has allowed President Xi Jinping to consolidate power since he took over as General Secretary in 2012 through the removal of the allies of former president Jiang Zemin (1993-2003) as well as purging corrupt officials from his own camp.

1b) If Wang Qishan Stays On, What Does This Mean For Xi?

Given that the retirement rule is not written in the party's constitution, there is a slim possibility that Wang stays on for a second five-year term in the PSC, with Xi using his authority as the 'core' of the party's leadership to keep Wang. If Wang were to stay on for a second term in the PSC, this could open the door for Xi to remain in power for a controversial third term and extend his leadership when his second term ends in 2022 at which point he will also be 69.

Whether Xi is looking to extend his leadership could also depend on the appointments to the PSC during the upcoming 19th Party Congress. At least one of the members of the PSC is likely to be placed on a 'five-year apprenticeship' under the current president and premier, before they take over these positions in the next party congress. This has been the case since the 14th Party Congress (1992) when Jiang Zemin was the leader. The reported investigation of former Chongqing Party Secretary Sun Zhengcai for suspected party violations reduces the number of candidates that are suitable to take over as president and/or premier in the next congress, with Guangdong Party Secretary Hu Chunhua now being the most likely candidate to lead the party. Xi could therefore potentially extend his leadership for a third term, if there are no other suitable candidates that are ready to form the top leadership. This however is not our core view

2) Domestic Politics: The Balance Of Power Is Shifting In Xi's Favour

President Xi has made considerable headway in consolidating power since he took office as the General Secretary of the Central Committee of the CPC following the 18th Party Congress in November 2012 and as President in March 2013, which can be seen from the elevation of his political status to 'core' of the party's leadership in October 2016. We expect a further strengthening of his authority following the 19th Party Congress. Indeed, the concentration of power has shifted from former President Jiang Zemin towards Xi at least at the provincial level through the reshuffling of leadership appointments. Additionally, the anti-corruption drive that took place since Xi took power in November 2012 also saw a weakening of power held by Jiang's allies. This, therefore, places Xi in good stead to secure positions for his allies in the Central Committee during the 19th Party Congress. This would strengthen Xi's position further over the next five years and also enable him to continue to wield power from behind the scenes when he is expected to retire in 2022.

3) Domestic Economic Policies: Pace Of Reforms To Pick Up

We expect the pace of reforms in China to pick up over the next five years, compared with the slow pace previously. That said, the cautious nature of the Chinese state, the need to maintain social stability, and the aim of reducing any potential loss in state assets mean that reforms will take place at a measured, rather than rapid pace.

The increased pace of reforms will be helped by the recentralisation of the Chinese government as President Xi Jinping has strengthened his grip over the local governments through a leadership reshuffle at the provincial level. According to our analysis, party secretaries in 13 out of mainland China's 31 provincial entities have affiliations with Xi at present, compared to just four when he took over as General Secretary in 2012. The upcoming 19th Party Congress is also likely to see Xi place his allies in the Politburo and the PSC.

Being the 'core' of the CPC's leadership, Xi is also responsible for the performance of the Chinese economy, and we believe that he will increasingly attempt to strike a balance between pursuing his political objectives of strengthening the party and country, and pushing through economic reforms.

We expect the Chinese government to continue to work on 'supply-side reforms', a concept that was introduced by Premier Li Keqiang in 2015, and is a key focus of the government's 13th Five-Year Plan (FYP). We therefore expect policymakers to continue to cut overcapacity in the steel and coal sectors over the coming years. Significant progress has already been made since 2016, and Beijing is on track to achieve their target again in 2017. Additionally, it is likely that the government will also make some progress in controlling the rise in debt levels across the economy through policies aimed at tightening credit conditions and slowing growth in the shadow banking sector, while Beijing will also continue to reduce costs for companies in China. However, an area that we expect the government to fall short in is reducing inventory levels in the property market, as it will focus more on maintaining the stability of the market. Furthermore, the government is likely to remain committed to carrying out SOE reforms through introducing mixed ownership structures, enhancing corporate governance, and conducting corporate and debt restructurings to reduce the misallocation of resources in the economy.

Key Reforms

Note: 1: Making little meaningful progress, 2: Making minor progress, 3: Making progress, but below our expectations, 4: Making progress, meeting our expectations, 5: Making progress, exceeding our expectations. Source: BMI

4) Domestic Economic Policies: China To Shift Towards Targeted Growth Range

There has been a shift by top Chinese leaders towards reining in financial risks in the economy since late 2016, with President Xi personally calling for more control of such risks. The increased focus on curbing financial risks suggests that Chinese policymakers are becoming more open to slower economic growth and achieving a target range, rather than a fixed target of 6.5%, in order to ensure sustainable growth over the coming years.

The focus on controlling risks has been in place since December 2016 and reiterated in the various announcements released from the PSC's meetings in 2017. Xi was also involved in the five-yearly National Financial Work Conference that was held from July 14 to 15, underscoring the importance of 'addressing financial risks' as a key policy objective. The political recentralisation of the government is also likely to enable better co-ordination of policies and inspections to be carried out at the local government to better manage these risks.

5) Geopolitics: China To Become More Assertive Globally

As China becomes more powerful and develops greater economic linkages within Asia, it is natural that the country will seek to broaden its sphere of influence to protect its growing international interests. We expect this to be achieved by both military and economic means, but note that China will largely continue to abide by international norms, as it is within its best interests to do so.

The Chinese leadership has taken pains to emphasise that China seeks to rise peacefully despite its growing military power and the inevitable build up in the country's military capacity as it is increasingly engaged with the world. China is, therefore, likely to play a more active role in issues that are deemed as directly affecting its national interests, such as in disputed areas in the South China Sea and the East China Sea. This could lead to increased tensions between Beijing and its neighbours; tensions are, however, unlikely to escalate into full-scale armed conflict. That said, we see considerable scope for geopolitical crises in East Asia, as the increase in military activity by China, the US, and Japan raises the scope for accidental or unintended collisions or skirmishes between rival aircraft and naval vessels in disputed areas. Such incidents would require considerable diplomatic skills on all sides to ensure that no party escalates.

In addition, China appears to be looking to extend its reach through the development of a blue water navy and the building of a naval base in Djibouti - which was formally opened on August 1 2017. We highlight that these developments do not necessarily mean that China will become more unilateral and seek to present itself as an alternative to the US navy. Instead, these developments will also help China become a more active member of the international community, as a stronger navy and a naval base will be positive for China's participation in international activities such as peacekeeping and the fight against piracy off the Horn of Africa.

As the Chinese economy expands and it becomes increasingly integrated with the international environment, we believe that it will likely seek to have a greater say in international organisations. We are already seeing signs of Chinese influence in certain areas such as trade and climate change, following US President Donald Trump's efforts to adopt a more protectionist stance. Having been a major beneficiary of an open trade system, Chinese President Xi Jinping pledged in early 2017 that China would maintain its commitment to upholding free trade. As such, while China is unlikely to seek to change the 'rules of the game' immediately, it will continue to try to influence decisions so that they work in Beijing's favour.

Economically, we expect to see China invest more heavily abroad through various new initiatives such as the Belt and Road Initiative (B&R), the creation of parallel institutions like the Asian Infrastructure Investment Bank (AIIB), as well as continued inflows of foreign direct investment (FDI) into various countries. While increased Chinese investment could lead to tensions and enable Beijing to use its economic strength to influence the countries it invests in, we believe that these countries are aware of this and will continue to attempt to strike a balance. For instance, fears of becoming over-reliant on Chinese investment have led Laos to seek other sources of investment from its neighbours such as Thailand and Vietnam.

6) Geopolitics: China-US Relations To Deteriorate

China-US relations have been rather positive since US President Donald Trump took office in January 2017, despite his campaign promises to adopt protectionist measures against China. That said, we expect China-US relations to deteriorate as President Trump steps up his protectionist trade rhetoric in 2018 and adopts more targeted measures against China. Sino-US relations could also come under greater strain if the US takes any actions that trigger a new conflict with North Korea. In the event of conflict, China could come to the North's defence or be drawn into a proxy war with the US. Even assuming conflict is avoided, Trump's growing frustration with Xi's inability to rein in North Korean leader Kim Jong Un's behaviour could prompt Washington to adopt a tougher stance towards Beijing over trade. It is also unclear if Trump may use support for Taiwan as a means to pressure China. Meanwhile, the amendments to the NAFTA deal will likely be settled by the end of 2018, which suggests that Washington will have greater capacity to focus on China. Moreover, Trump may adopt a tougher stance in an effort to secure more votes for Republicans in the US mid-term election to be held on November 6, 2018 - especially considering that he will likely under-deliver in his first year of office (see 'Assessing Trump's First 100 Days: Under Delivering', April 28). 

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