The US Presidential election is hogging headlines globally, but it’s not this week’s only election. China’s Communist Party will also “elect” its next generation of leaders at the 18th annual National Party Congress, which begins on November 8 in Beijing.
I put “elect” in quotes because China’s system is not democratic. The party’s upper ranks will select the Central Politburo—national leadership—and the Central Politburo will elect a seven-member Standing Committee, which controls national policy. The Standing Committee also selects the next Party General Secretary (President) and Premier.
Hu Jintao and Wen Jiabao, the outgoing President and Premier, are considered reformers. Their faction is at odds with the ultra-conservative New Left faction, led by former President Jiang Zemin. He tried making a power play earlier this year through his protégé, Bo Xilai, who was gunning for an appointment to the standing committee, but when Bo fell from grace amid allegations of murder and corruption, he was expelled from the party and his high-ranking post as Chongqing party leader. His expulsion seemed to be a strong message to Jiang and his faction: There’s no room within party leadership for those who’d turn China away from reform and back to Mao-era, strict communist ideals. And soon after his expulsion, party leaders scheduled the long-delayed Party Congress, suggesting the political transition was on track and the New Left was quelled.
According to a report in the Hong Kong press, however, that may not be the case.
Now, China’s state-run media has yet to confirm this, so it’s all a rumor at the moment. However, if true, Jiang’s acolytes will occupy the majority of the Standing Committee—and these gentlemen believe the government needs to manage the economy with a much heavier hand. They don’t quite realize China’s economy has outgrown this approach, and that in order for China to continue growing over time, more market-oriented reforms are necessary. They also don’t realize it was massive fiscal stimulus, not careful top-down economic management, that insulated China from economic shock in 2008—stimulus that fueled high inflation and too-high property prices, which required a government-engineered economic slowdown. They simply see more market liberalization and wider economic disparity occurring simultaneously and incorrectly assume causality. They don’t understand freer markets should help even out these disparities over time, while more state control would likely ensure wealth remains concentrated at the very top, among those who control the largest state-owned businesses.
This could have profound implications on Chinese economic policy over the next several years. While Hu and Wen’s hand-chosen successors, Xi Jinping and Wen Jiabao, respectively, will retain their Standing Committee posts and still appear likely to become the next President and Premier, if the New Left dominates the Standing Committee, their hands will be tied—they likely won’t be able to implement many of the reforms China needs in order to diversify its economy. For example, the New Left faction likely doesn’t want to continue building out China’s corporate bond market. They’d probably rather return control over corporate financing to the state, which would mean smaller private firms and entrepreneurs would have a much more difficult time accessing credit, while the government, state-run banks and state-owned businesses would become even more intertwined, fueling corruption and hurting other businesses’ abilities to compete. Considering private firms tend to be more profitable than China’s large state-owned firms—9.9% more profitable, according to a joint study by the World Bank and Chinese government—policies that limit these firms’ abilities to compete and grow over time could introduce big problems for China’s economy over the next several years.
In the near term, regardless of which faction wins out, China’s economy should still grow—and likely at a faster rate than in recent quarters. All of the fiscal and monetary stimulus measures enacted over the past 3-12 months are starting to flow through to the broader economy, and economic growth should get a nice boost. But looking longer term, if we see more of Jiang’s protégés on the podium when the Standing Committee is revealed next week, Chinese businesses may have a more difficult road. All eyes will be on Beijing for the next week.