Politics to Rule Economics at China’s ‘Game Of Thrones’

Political maneuvering, rather than economic reform, is set to dominate China’s upcoming Communist Party Congress. However, the rise and fall of key figures in China’s version of “Game of Thrones” could yet prove crucial in determining the fate of Asia’s biggest economy.

October 18 will see the opening of the party’s 19th National Congress, with an estimated 2,300 delegates in attendance for the week-long meeting. Held only twice a decade, the congress is expected to see Chinese President Xi Jinping consolidate his rule over the tightly controlled nation of 1.3 billion people, extending his reign for another five years and potentially even longer.

Already, the power plays have commenced in the lead up to the congress. Sun Zhengcai, the youngest member of the Politburo and party boss of the inland city of Chongqing, was dumped and placed under investigation in July.

Two generals, Fang Fenghui and Zhang Yang, both members of the key 11-member Central Military Commission, were removed from the delegate list for the congress. The move reflects Xi’s “blood-and-guts battle with the Hu and Jiang factions” of his predecessors, according to Nikkei.

Xi could further consolidate power by enshrining his political doctrine in the party rules, as well as retaining 69-year-old anti-corruption czar Wang Qishan as a Politburo Standing Committee (PSC) member. The latter move would be a breach of unwritten party practice, since Wang is already a year past the traditional retirement age.

An even bigger step would be for Xi to officially extend his reign beyond the 2022 congress, and take the post of “party chairman” akin to former strongman Mao Zedong, the Japanese financial daily said.

Xi has already moved to reduce the influence of former President Jiang Zemin and his allies. According to BMI Research, a “significant number” of Xi’s supporters have been appointed as party secretaries since 2016, with 13 out of 31 provincial-level leaders currently tied to Xi compared to just four when he assumed power in 2012.

Next Leader

With five of the seven PSC members seen likely to change, excluding the president and premier, the congress could see the emergence of the one-party state’s next leader, assuming Xi does step down as scheduled in 2022.

BMI Research’s Cedric Chehab, head of global strategy, has pointed to three candidates seen as the most likely to be elected to the PSC, comprising 56-year-old Hu Chunhua, 60-year-old Zhao Leji, and 62-year-old Wang Yang.

Currently party secretary of Guangdong province, Hu has risen rapidly through the ranks and has long been viewed as a potential “sixth generation” leader, Chehab said in a September 7 presentation. The recent downfall of rival Sun Zhengcai has further boosted his position, with Hu having “a good chance to become the next president or premier in 2022,” he said.

Zhao is also seen having significant influence due to his position as head of the party’s organization department, giving him “significant access” to senior party members. With support from both former President Hu Jintao and party elder Zeng Qinghong, “he could act as a bridge builder between the various factions and help secure compromises,” Chehab said.

Wang’s position as one of four vice premiers and deputy leader of the key group behind Xi’s Belt and Road Initiative has given his prospects a boost. “His role has given him significant international exposure, as he has accompanied both President Xi and Premier Li [Keqiang] on international trips… he also has a strong track record on implementing reforms in the provinces of Chongqing and Guangdong,” Chehab said.

Tighter Grip

BMI Research expects policy stability to be the key focus of both China’s government and central bank ahead of the congress. Assuming Xi’s re-election as general secretary, policy continuity is expected in his second term, yet with some potentially significant steps.

Xi’s anti-corruption drive is seen as slowing further, with the number of investigations having peaked in 2014 at around 400 officials and subsequently fallen each year, with just 150 probes in 2017. More significant is the position of corruption fighter Wang Qishan, who, if given a second term in the PSC, “could open the door for Xi to remain in power for a controversial third term,” Chehab said.

Concerning economic reform, “anyone who anticipates a very sharp acceleration in reforms [post-congress] will likely be disappointed, as Beijing will continue to prioritize social and economic stability,” the analyst said.

Nevertheless, despite occasionally taking a “backward step,” BMI Research sees the pace of reforms gradually rising to encompass more sectors of the economy. This could comprise extending capacity cuts in the coal and steel industries to other industries such as cement and glass, as well as gradual changes to improve the productivity and profitability of state-owned enterprises (SOEs).

Amid an estimated national debt burden exceeding 260 percent of gross domestic product (GDP), Beijing is expected to tighten credit conditions following the congress, as well as implementing government cost cuts. Real estate inventory will be reduced as part of efforts to curb a house price rally, with the focus on creating a “subsidized housing market” rather than direct intervention, BMI Research suggests.

Another key economic shift will be moving away from a “hard target” for GDP growth toward a “target range,” highlighting a greater degree of policy flexibility in response to financial risks.

“The focus on curbing financial risks suggests that policymakers are more open to slower economic growth,” BMI Research said, predicting GDP growth of 6.6 percent for 2017 and an annual average of 6 percent over the next five years.

The London-based consultancy also sees Beijing becoming more assertive in growing its “sphere of influence” in Asia, including in the South China Sea and the Indian Ocean. Its recently created economic institutions, such as the Silk Road Fund and Asian Infrastructure Investment Bank, are seen as challenging existing Western institutions in addition to supporting its Belt and Road investments into an estimated 64 countries.

China will also exert greater influence over trade through the Regional Comprehensive Economic Partnership (RCEP), with Chehab suggesting the Trans-Pacific Partnership (TPP) trade agreement is “dead in the water” following U.S. withdrawal.

“We expect relations with the U.S. to deteriorate somewhat as protectionist rhetoric escalates… It would have seemed that relations would have improved slightly after the signing of the 100-day plan in April between the U.S. and China, which permitted greater U.S. exports to China, but it seems that little progress has been made ever since,” Chehab said.

U.S. President Donald Trump’s “growing frustration with China’s ability to rein in North Korea could also result in Washington adopting a tougher stance toward Beijing over trade,” he added.

Chehab sees Xi extending his influence beyond 2022, “ruling from behind the scenes” even if he does step down as planned.

Other analysts have also pointed to a likely continuation of Beijing’s policy agenda post-congress. In a September 13 report, Capital Economics said it did not anticipate any “major changes” in policy goals, although a stronger Xi would be “better placed to speed up the implementation of his existing agenda.”

“Economic policy should receive some attention in the report that Xi will deliver on the first day of the meeting… But if history is any guide, the discussion will remain very broad-brush and full of platitudes,” the London-based consultancy said.

“Given this, we may have to wait until the Central Economic Work Conference in December, the National People’s Congress in March, or even the Third Plenum in a year’s time for greater clarity on the post-congress policy agenda.”

Capital Economics said reform progress had been mixed in recent times. While cuts to industrial capacity and a shift toward public-private partnerships have made progress, moves to rebalance fiscal responsibilities, improve SOE performance, and modernize agriculture have stalled.

Similarly, efforts to open China’s capital account and internationalize the Chinese yuan “fell by the wayside” when the currency came under pressure. “Likewise, it is no coincidence that efforts to tackle financial risks are receiving greater emphasis now that growth concerns have eased,” Capital Economics said.

However, the appointment of key policymaking individuals such as Liu He “will give us some sense of whether the political winds are blowing in the reformists’ favor. Hints of who may succeed People’s Bank Governor Zhou Xiaochuan, due to retire next March, may also provide clues.”

Yet the outlook for Xi’s next term faces a number of potential risks, ranging from a domestic debt crisis or social unrest to external threats, such as war on the Korean Peninsula or a trade war with the United States. Recent moves to shut down a number of popular Chinese television news and entertainment programs suggest Beijing remains nervous of any dissent.

For economy-watchers though, the fate of the world’s second-largest economy could yet be determined by a handful of key decision-makers appointed at next month’s meeting. For Beijing’s version of Game of Thrones, the stakes have never been higher.