A few weeks ago, China made a “dangerous” and “undesirable” announcement… at least, according to the western media.
On that day, China’s National People’s Congress announced that it had voted to abolish the two-term limit for its president.
That means President Xi Jinping can remain in power past his previously mandated retirement date of 2023… and beyond.
This move caught many people off guard. They assumed that China’s opening up to the global economy meant that the country was moving down a path closer to western models.
But it wasn’t a surprise for people who are involved in China’s economy. Since his ascendancy to the top job in 2012/2013, Xi has concentrated power into his hands and his close inner circle. And now, the doors are open for Xi to remain in power for the rest of his life.
So what does this mean for China – and the rest of the world – going forward?
First, let me make one point clear – we’re in the investment research business… not political commentary. When the two intersect, we try to figure out the impact that government policy might have on asset prices. So I’m less interested in Chinese politics per se – and more interested in the effect of Chinese politics on the prices of equities, bonds, real estate, commodities, currencies and other assets.
Not his only post
President Xi holds two other posts besides the presidency. He is the Communist party general secretary, and chairman of the party’s central military commission. These posts are not subject to term limits. So Xi could already remain in these posts indefinitely, regardless of the recent change to the constitution.
Some argue that these posts give more power for the day-to-day operation of the country than the presidency. The presidency – so this line of argument goes – is more a face to the outside world, than a force for day-to-day control of the economy.
So the recent presidential term limit abolishment could be viewed as just another way to give the central authorities greater power and control over the economy, business and markets. And it comes across to many reform-minded people inside China, as well as outsiders, as a step backwards in China’s apparent path towards liberalisation of its economy, business and social framework.
Control is nothing new
Chinese authorities have long closely controlled the media and the internet. Sites like Google, Facebook, Instagram, Twitter, Flickr, Spotify, Messenger and a flurry of others are blocked in the country. Researchers, tech companies, academics – both local and foreign – debate how these policies will affect the evolution of the business environment in China.
And there has been growing concern about the government’s increasing protection of its national champions. In the old days, this was typically for smokestack industries. But more recently, the bigger technology-driven companies are being protected from external competition through rules and regulations – which will inevitably come at a price.
Companies dealing with China are also increasingly on notice that foreign direct investment, technology transfer and business development will be more subject to controls dictated by the Communist party.
For example, I was recently told by a senior business leader of a global technology company – with more than 10,000 staff in China – that the company must now promote the establishment of Communist party committees inside its operations in the country. This was already a requirement for local companies, but is now being imposed on foreign companies. And these Communist party committees are expected to have a voice in the way the company is run, its strategies, its investments, its structure and relationships.
The real danger
In the bigger picture, a big danger of the “president for life” approach is the potential for policy mistakes to go unchecked. In other countries, we’ve seen leaders start out reform-minded. But under the golden halo of absolute power, they became an autocratic “bad emperor” without any formal constitutional means of ridding the system of its excesses.
So far, there have been few major policy blunders in China that have had the potential to bring the economic system crashing down. But the imposition of unchecked, unlimited power increases the risks of such errors over time.
Does this all suggest that reforms are now on the back burner? Not necessarily.
Since President Xi hit the top spot in China, some elements of reform have been pushed forward, new ones have been initiated, and key components of macro risk are being addressed.
What about reform?
For example, a central element of Xi’s rule has been his intense crackdown on corruption. Under his rule, hundreds of thousands of people in government, the Communist party, state-owned enterprises, private companies and the military have been rounded up and incarcerated. This programme has been popular with the broader population that’s fed up with the unchecked corruption that grew under the country’s previous leadership.
And take the reform of the big smokestack industries of coal, steel, aluminium, power and cement. There is substantial excess capacity in most of these, most notably steel. Think tank Peterson Institute for International Economics estimated in 2017 that China’s actual excess capacity that was being used was about 130 million tons. This is about 65 percent higher than the total production of crude steel in the U.S.
Various high-level bodies have set targets for reduction in steel capacity from 65 million tons to as much as 150 million tons. In March 2017, Premier Li Keqiang announced that “over the year iron and steel production capacity was cut by more than 56 million tons”. Li (and others) have continued to drive supply side reforms in these smokestack industries in an effort to reduce excess capacity. These reforms also include merging some state-owned enterprises (SOEs) to cut costs and capacity.
And since Xi has taken the reins, China’s “growth at any cost” mentality has dissipated.
Gone is the push for 8 to 9 percent economic growth. Xi’s government knows that pace cannot be maintained. Somewhere in the 6 percent to 7 percent range is now the target.
Efforts to place more controls on lending should ensure that the pivot to a more consumption-driven economy from a capital expenditure and export-driven economy will continue.
The rapid growth of debt in China since the global financial crisis has also been cause for concern… and rightly so. All manner of policy agencies, senior political figures, think tanks and the head of the People’s Bank of China (China’s central bank) have sounded warning bells, and introduced all manner of measures to control lending. The shadow banking industry has come under close scrutiny – and lending via the myriad of wealth and insurance related funds management vehicles, trusts and pass through entities has been slowed substantially. (We talked more about the crackdown on debt here). Policy measures have at least curbed many of the worst excesses in the lending scene.
Going forward, Xi’s mantra is “stability”. This refers to lots of threads of China’s economy and social conditions. And it is that overriding policy that will give the government the ability to manage the economy and people’s expectations. And for the moment, stability is something the markets seem to like.
Reforms are happening in China. And all may not necessarily be what it appears in China.
