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