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The Far More Important 'Election' Part 1: China's Political Process

Tyler Durden's picture




 

The imminent once-in-a-decade leadership handover in China will likely be one of the most important if not the most important leadership changes in the world this year and beyond in Goldman Sachs' opinion. Not only because it has the potential to mark a shift in policy direction in what has become a global economic giant, but also, as they note, because it comes at a time of substantial economic and social uncertainty in the country, with the economic future of China and the legitimacy of its current power structure potentially at stake. On the eve of this important transition, understanding this somewhat complex power structure, the composition and policy leanings of the likely new leadership, and the potential new policy priorities and reforms ahead is critical.

Via Goldman Sachs:

Excerpted from interview with Cheng Li of the Brookings Institution

...In the 18th Congress all of the top Party leaders in political affairs, economic administration, financial policy, foreign policy, the military and domestic security will be replaced.

...

There are three reasons why this leadership transition is particularly important:

  • First, this is the first transition that is taking place at a time when China has emerged as an economic giant, the second most important economy in the world.
  • Secondly, China’s upcoming leaders are generally far less understood and their policies and ideologies far less known because there is not typically a lengthy campaign as there is in the US and in other parts of the world.
  • Third, the crisis of Bo Xilai (a former top-ranking Chinese politician who was expelled from the Party in September due to alleged corruption and other criminal charges) tremendously increases the risk around China’s future. The importance of the Bo Xilai crisis can not be overstated, because this crisis revealed fundamental flaws in the Chinese political system, and the rampancy of corruption at a very high level of leadership. It led the Chinese public to ask how this kind of ruthless leader could have stayed in power for over 20 years. But it is complicated by the fact that Bo Xilai still has a lot of supporters in the country, who think he was treated unfairly and still believe that he represents the interests of the poor. This is a crisis, not about Bo Xilai, but about the legitimacy of the CPC itself?the biggest political crisis at least since 1989 Tiananmen.

...

The party congress usually lasts for 7 days, so we should expect it to run from November 8 to November 14.

 

There are several main components of the agenda but the most important is the leadership selection. The Central Committee (comprised of about 370 people) will most likely be selected on the last official day of the Congress (November 14), and on the following day this newly elected Central Committee will elect the Politburo (about top 25 leaders), the Standing Committee of the Politburo (top 7-9 leaders and the ultimate decision making body), and the General Secretary (head of the Standing Committee and the top leader of the CPC and, ultimately, the PRC) as well as the Central Military Commission (CMC):

 

...

It is fairly certain that Xi Jinping will take the top post of General Secretary of the Politburo Standing Committee and will ultimately be named the President of the PRC and that Li Keqiang will obtain the 2nd ranking position in the Standing Committee and will ultimately assume the role of Premier of the PRC government. There is less certainty about the remaining Standing Committee members (see page 6 for other contenders). But I believe that it will be crucial to maintain a balance in members between the two factions respectively led by the former General Secretary Jiang Zemin and the now departing General Secretary Hu Jintao, resulting in a Chinese collective leadership comprised of “one party, two factions.” These two camps are almost equally powerful, but represent different socioeconomic and geographical constituencies. It is critical that this balance be achieved because otherwise the defeated faction would use its resources to undermine the stability of the political system.

 

...

As soon as the new Party leadership is announced, they will be in charge... There is no formal process to hand over power during this period. In practice, the retiring leaders will still function as the state leaders, but will slowly depart from the scene. Even during this transition period, I believe that the new leadership will begin to make important decisions. There will be a short-lived - maybe lasting 6 months or a year - honeymoon period during which time all leaders, whether or not they are in the same faction with Xi Jinping, will unite with him. This is especially the case now because the party cannot afford another vicious power struggle.

There will likely be two top priorities.

  • First will be employing structural reforms to address the current economic challenges and discontent among various socioeconomic groups, especially the middle class. Policies to address this will generally promote the private sector and liberalization of China’s financial system. A crackdown on state monopolies will be a must.

    These monopolies are widely viewed as crowding out private sector investment, shrinking the middle class, facilitating crippling corruption and stalling innovation that China greatly needs to aid its transition from an export-led to a consumption-led economy.

    Banking system reform will also be critical to addressing the economic challenges. Reforms might include introducing foreign banks into the Chinese market and systematically increasing the availability of loans to the private sector. The dilemma is that there are powerful interest groups working against these reforms. But I believe that the leadership will nevertheless be committed to undertaking them because the alternative is continued major economic problems and, ultimately, crisis as the middle class’ patience wears thin. Although the recovery of the middle class will be most crucial, there will also likely be policies aimed at the lower income class, such as social welfare reform, to offer them some kind of incentive and hope for further economic reform.

  • The second priority will likely be political reform, to address the crisis of legitimacy raised by the Bo Xilai episode. Political reform will likely be centered on the establishment of an independent judicial system and credible rule of law, which will resonate well across all sectors of Chinese society as everyone wants the ability to protect their interests. This is a more effective way forward for political reform than the pursuit of democracy because some factions may resist democracy owing to conservative ideology and political interest, but in a country without the rule of law, no one is safe. In addition, I believe that new leaders will also aim to adopt more intra-party election in order to build new sources of legitimacy. If they cannot make progress on these two areas in a short period of time, I think the Party will be in big trouble.

How likely is it that China faces a major political uprising, similar to Tiananmen?

I see the possibility for such a real crisis, but do not believe it’s inevitable. The Bo Xilai crisis may be an even bigger crisis than Tiananmen in terms of its impact on the legitimacy of CPC rule. But at least so far, China’s economy and society have not been disrupted in the same way. Why? Because today there are several stabilizing forces in the country that did not exist then. First, the middle class did not exist in 1989 and has now emerged as a distinct socioeconomic force. Second, the legal profession has become much bigger, more dynamic and more independent. Third, the media has become more commercialized and influential despite ongoing censorship. Fourth, various interest groups including foreign business interest groups have become more numerous and more important, and, finally, there is generally a perception that China is on the rise, not in decline. This shared aspiration will enhance the public confidence for China’s political transformation. 

There are still very real concerns; the Bo Xilai crisis in particular is still unfolding with his trial yet to take place. But I believe that the new leadership will have at least a couple of years to deal with the current challenges, and overall there is a good chance of preventing a bottoms-up revolution.

 

I believe that in the next ten years the Chinese political system will be quite different. I estimate a 50% chance that the whole game will change profoundly by 2017, and even a chance that there won’t be the same kind of Party Congress by 2022. Instead, we could see a more transparent political process, more accountable and representative government, and increasingly democratic elections both within the Party and in the country. And it’s possible that very abrupt (yet largely non-violent) change could happen. Some intellectuals in China argue that cultural change takes 60 years, economic change takes 6 years, but political change takes 6 days, or even a weekend.

 

Source: Goldman Sachs

 

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Mon, 11/05/2012 - 23:24 | 2950798 Darkness
Darkness's picture

Hard landing imminent. 

Mon, 11/05/2012 - 23:39 | 2950824 ACP
ACP's picture

"Yes Mr. President, the erection results are in."

Mon, 11/05/2012 - 23:59 | 2950870 DoChenRollingBearing
DoChenRollingBearing's picture

China is so murky unless you are an expert.  "MISH" (Michael Shedlock) has a blog that frequently has snippets from China expert Michael Pettis, check out MISH's blog:

globaleconomicanalysis.blogspot.com

Tue, 11/06/2012 - 00:11 | 2950900 ACP
ACP's picture

Speaking of elections......more proof that no one in their right fucking mind should ever listen to anything Jim Cramer ever says:

http://www.theblaze.com/wp-content/uploads/2012/11/Washington-Post.png

Edit: I almost forgot...yes China is extremely murky, and I often interrogate my Chinese expatriate friends - who live near, but not in, the mainland. It seems the only thing holding their economy together is their ability to suppress information, which is slipping...

Mon, 11/05/2012 - 23:41 | 2950828 markmotive
markmotive's picture

What election?

Mon, 11/05/2012 - 23:38 | 2950807 NoDebt
NoDebt's picture

As we have learned here on ZH, China might be 'The Big One' when it comes to debt bubbles.  If true, policy will be handcuffed by debt there as it is here now in the US, in Europe, etc.  They may be locked into the "preserve the status quo at all costs" course as well.

If so, expect no miracles (or even big changes).

Tue, 11/06/2012 - 07:30 | 2951199 Urban Redneck
Urban Redneck's picture

They may desire to maintain the status quo, but when certain figures push certain other figures into a box, then the only options left are for the boxed figure are to fight back, or walk away from the power structure- which would render "balance" unachievable.  GS is always for maintaining the oligarchy, regardless of the continent, but I think they may be wishing for a bit much in the Chinese case.  "It is critical that this balance be achieved because otherwise the defeated faction would use its resources to undermine the stability of the political system."  

Mon, 11/05/2012 - 23:33 | 2950815 _Mr.L-HRecruit_
_Mr.L-HRecruit_'s picture

While not wishing any ill-will on the good PEOPLE of China, I do find a rather delicious irony in the fact that their corrupt and communistic leaders have seen fit to jump on the "capitalist bandwagon" just before our corrupt and communistic leaders veering HARD LEFT, crash headlong into them, as they are veering HARD RIGHT, lmfao, may they all crash and burn and THE PEOPLE are left standing as these pukes all burn up together.  

Tue, 11/06/2012 - 00:03 | 2950869 Dr. Engali
Dr. Engali's picture

"Secondly, China’s upcoming leaders are generally far less understood and their policies and ideologies far less known because there is not typically a lengthy campaign as there is in the US and in other parts of the world."

Are you fucking kidding me? Four years of holding office, campaigning, and shifting of positions and we still don't know what these assclown's policies are.

Edit ... Yes we do.. More of the same plundering and raping of the U. S. citizen.

Tue, 11/06/2012 - 00:14 | 2950911 AldoHux_IV
AldoHux_IV's picture

The banking cabal has its sight on China and the pretty bullet points pretty much sum up how any policymaker falls for the bullshit spouted by economists and bankers.

Corruption, banking, and leverage the 3 major tenets of being a developed world.

Tue, 11/06/2012 - 00:24 | 2950930 Yen Cross
Yen Cross's picture

China has to be "unequivocally" the most corrupt bunch of Bull-shitters there is, when it comes to financial disclosure of any sort!

 The numbers that come out of that unicorn infested waste land, are so far from reality that a "babbling orangutan" could see through them! How the hell do you turn an economy of 1.3b around in 2 months? It's complete B/S to give the illusion that internal consumption is up and, therefore exports aren't as important for their GDP.

 China the land of the "unicorn filled ghost cities"...

Tue, 11/06/2012 - 08:54 | 2951313 Karl von Bahnhof
Karl von Bahnhof's picture

Just a short note from today's Wayne Madsen

Chinese official: Neil Heywood died knowing "unspeakable secret." Yes, how Rothschild and Soros were planning to insert Bo Xilai into the Politburo and bring down the People's Republic.

sic.

 

Tue, 11/06/2012 - 10:11 | 2951472 Urban Redneck
Urban Redneck's picture

A forensic expert at the Supreme People's Procuratorate grew a "conscience" and decided to speak up?  BULLSHIT.  She got a memo from TPTB. But it raises the likelihood that the charges and co-conspirators in Bo's indictment won't conform to the dominant speculation (or be to Goldman's liking).

Tue, 11/06/2012 - 02:17 | 2951057 q99x2
q99x2's picture

Hope they don't destroy their country by making a deal with the money changers.

Tue, 11/06/2012 - 06:11 | 2951165 putaipan
putaipan's picture

i don't know squat... but i'm thinkin' that the money changers are using china as the last great vaccuum sucking up the worlds gold.

Tue, 11/06/2012 - 09:43 | 2951422 Shelby Moore III
Shelby Moore III's picture

They are sucking up all the manufacturing with their negative -800% profit margins slavery Yuan peg system. Read mpettis.com This was done to help the goals of the money changes and the move to a one world system.

Tue, 11/06/2012 - 09:41 | 2951411 Shelby Moore III
Shelby Moore III's picture

The deal was made a long time ago.

Tue, 11/06/2012 - 07:00 | 2951186 Ox
Ox's picture

This is far too confusing.

 

The Chinese people should demand Western style democracy so they can choose their dictator, just like us.

Tue, 11/06/2012 - 09:44 | 2951417 Shelby Moore III
Shelby Moore III's picture

deleted

Tue, 11/06/2012 - 09:25 | 2951375 CrabGrassKila
CrabGrassKila's picture

Confucius say: Suck to be you for tearing Lead-lined room down.... We still Commie

 

Tue, 11/06/2012 - 12:08 | 2951898 lolmao500
lolmao500's picture

Except no society can do reforms that deeply without collapsing... it hasn't been done with such old systems.

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