Reading the Tea Leaves of China's Big Changeover

Agenda-Setting Financial Insight.
Aug. 28 2012 4:36 PM

Reading the Tea Leaves of China's Big Changeover

150343605
Hu Jintao's days in power are waning, but who is prepared to take his place?

Photo by Ed Jones/AFP/GettyImages

China’s once-in-a-decade political changeover is almost here. Unlike the U.S. presidential race, there won’t be televised debates, nail-biting final counts or star-studded inaugurations. But that doesn’t mean there won’t be drama. Here’s what to expect from the geopolitical event of the year.

When does it all kick off?

Advertisement

After the Communist Party’s 18th Congress in a few weeks, the new members of the Politburo Standing Committee, the Party’s top team, will be announced. Six months or so later, they will officially take charge.

It’s almost certain that the general secretary of the Party - and thus president of China - will be Xi Jinping, the son of a military hero. Li Keqiang, the only other member of the outgoing nine-person committee young enough to keep his seat, is likely to become premier, the official head of the government.

Who else? The fog descends. Guangdong Party chief Wang Yang, a rival to the fallen party chief of the city of Chongqing, Bo Xilai, is a recurring name. Others are Li Yuanchao, who heads the Party’s colossal human resources division, and Wang Qishan, the vice-premier in charge of finance.

Much is unknown, including the date of announcement and even the actual number of men (a woman would be a huge surprise). Nine could become seven. Continuity, both of personnel, and outlook, will probably prevail, though. The recent appointment of provincial party chiefs brought few surprises - almost all are men in their fifties and sixties.

So it’s all pretty much scripted?

Not necessarily. The last round in 2002, when Hu took power, was relatively smooth. Hu had been groomed by Deng Xiaoping, the Party patriarch of the post-Mao years. With Deng long gone, things are more precarious.

That might explain why the Party’s propaganda machine has gone all out to ensure stability. Recent flare-ups of social unrest have been stamped out with force, and web searches are being censored more heavily than ever. Harmony is being maintained at great effort.

If anything, the Congress might be too quiet. Despite a slowing economy, the central government has shied away from decisive but possibly controversial policies like fiscal stimulus. If the economy gets worse, the new leaders may have to develop a concerted economic rescue plan in a hurry.

Why the anxiety? Isn’t China basically a one-party state?

Sort of. China-watchers talk of three rival groups within the Communist Party. First are the former members of the Communist Youth League, who include Hu himself as well as likely premier Li Keqiang. Then there are the “princelings”, sons and daughters of Party elders, who include Xi Jinping, current finance chief Wang Qishan, and Bo Xilai. To think of them as a group may be misleading, since princelings share privilege, but not necessarily ideology.

Finally there’s the Shanghai gang, who served under former president Jiang Zemin in that city, and includes figures from other cliques too. The People’s Liberation Army is a fourth possible force. It has been sidelined from mainstream politics in recent years, but could make a comeback.

China’s opaque system and curbs on political debate obscure who really wants what. Personality clashes are kept strictly secret - a far cry from inter-party squabbles in Japan. It’s hard to see who is in and who’s out until, like Bo Xilai, they are rudely purged.

So what about Bo?

The ouster of Bo Xilai disproved the theory that the new line-up had been set in stone long ago. Bo’s end was reminiscent of the purges of the Mao era. His wife has been convicted of the murder of a British family friend, but Bo’s alleged crimes still haven’t been detailed.

While Bo’s fall created excitement, it probably didn’t change things much beyond freeing up a space on the standing committee. It may even have made the transition more stable. By distancing itself from Bo’s supposedly “Maoist” excesses, the Party managed to appear more moderate - and even more harmonious.

Why should anyone outside care?

Because the new leaders are probably the most powerful politicians in the world. China is on track to become the world’s biggest economy mid-way through their tenure. If they fail, foreign investors, who poured in $116 billion of direct investment in 2011, will suffer, and sections of the population will grow restless.

It’s a big challenge. China has complex needs: a social safety net, better capital allocation, local government reform. But changes in anything from the demographically dangerous one-child policy to the controversial “hukou” ID system must overturn tradition and overcome vested interests.

The new leadership will also have to decide how to deal with the rest of the world. For one, foreign investors want in, and Chinese investors want out. Looser capital controls and fewer restrictions on cross-border investment would be good for long-term development, but might create worrying floods of money in the short term.

Politically, the hot-button issues will be China’s relationship with America, and tense territorial disputes with Japan and the Philippines. How well Xi balances the jingoistic factions of his government may give a clue as to whether China can continue its famed “peaceful rise”. The rest of the world should hope it can.

Could Xi take China in a new direction?

It’s possible. Wen and Hu emerged from a period when China was closed to the world. Xi and his cohorts are younger, and have seen the benefits of trade and openness - though they have also seen China take the blame for global imbalances. Xi will need grit and charisma to win over Party hardliners, but those same traits might make for fractious foreign relations.

A good indication will be where Xi directs his early policies. China’s leaders love grand gestures. Perhaps he will bail out the flagging export sector, or accelerate reforms that boost other sectors of the economy, like services. Where Hu and Wen were engineers, Xi and Li are lawyers, so they may focus on developing rule of law.

If all else fails, listen to the slogans. Hu Jintao brought the world “scientific development” and “harmonious society”, which pretty accurately sum up his achievements, and failings. Xi has many buzzwords to choose from; “rebalancing”, “equality” and “reform” are all possibilites. His choice will define the next decade, and not just for China.

John Foley is breakingviews' Greater China correspondent, based in Hong Kong. He previously wrote on mergers and acquisitions, capital markets, consumer goods, mining, and luxury.