Reading the Tea Leaves: Meet China's New Leaders

The new General Secretary of the Communist Party of China strode to the dais of the Great Hall of the People in Beijing waving and smiling – and fashionably late. “Hello everyone,” said Xi Jinping, who is still the country’s vice president, but will ascend to the presidency next year. “We have kept you waiting.”
 
He and the six other members of China’s new Politburo Standing Committee (two fewer than in the previous one) met the press 45 minutes later than scheduled on 15 November. That’s a wait that pales in comparison with the time Xi had spent awaiting his turn at the top – China’s Communist Party (and thus the government) changes leaders once every ten years. 
 
Now comes the hard part, for both the incoming government and Asia’s businesses – for what company in the region is not affected directly or indirectly by what happens in the world’s second largest economy? According to the International Monetary Fund, China now accounts for about 50% of all intra-regional intermediate imports. 
 
In addition, says the IMF, “increasing direct and indirect access to the Chinese consumer goods markets could offer lasting benefits for Asian trading partners.” As companies in Asia plot their strategy in the medium and long term, it is therefore crucial for CEOs, CFOs and others in the executive suite to know where the country is headed economically and politically.
 
Will China be open to foreign goods, services and investment, particularly those from Asian neighbours? Will it restrict outbound investment? Are the new leaders serious about structural reforms and other initiatives to rebalance – and therefore strengthen – the economy to focus on domestic consumption? Are they up to the task of strengthening political and social stability?
 
Reformist or Conservative?
It’s difficult to get definitive answers to these questions in China, where the Communist Party tightly controls information and its dissemination. But that has not stopped domestic and foreign analysts and the media from making educated guesses, particularly on the vexed question of whether badly needed economic and political reforms will be given more attention.
 
The logical starting point is an examination of the antecedents, philosophies and policy inclinations of the seven members of the new Politburo Standing Committee, China’s highest governing body.  Below is a brief rundown of the new leaders:
 
Xi Jinping, 59, the new party General Secretary, is the son of revolutionary hero and former vice-premier Xi Zhongxun. He was party secretary of Zhejiang province, where he was instrumental in extending support to Geely Auto and Alibaba Group, now two of China’s best known companies. “Some commentators have extrapolated from his past experience at the helm of provinces with booming private sectors to suggest that we should expect a greater push for economic reforms, including more favourable policies for the private sector,” notes investment bank J.P.Morgan.
 
Li Keqiang, 57, is the presumed successor to Premier Wen Jiabao, whose term ends in March 2013. Li has a law degree and PhD in economics from Peking University and has been a Vice Premier since 2008, with a portfolio covering economic affairs. As party secretary in Liaoning province, J.P.Morgan notes, Li had led the initiative to clear slums and replace them with social housing sold at subsidized rates.
 
Zhang Dejiang, 66, is currently party secretary of Chongqing, the post formerly held by the disgraced Bo Xilai, once seen as a future leader until his wife was ensnared in a homicide and corruption scandal earlier this year. Zhang studied economics at the Kim Il Sung University in North Korea and was previously vice premier in charge of energy, telecom, and transportation.
 
Yu Zhengsheng, 67, majored in automatic control of ballistic missiles in college and has been on the Politburo for nearly two decades. He is currently party secretary of Shanghai, bailiwick of former president Jiang Zemin. He was Minister of Construction in the cabinet of Zhu Rongji, the admired premier who oversaw double-digit economic growth during his 1998-2003 tenure. Yu has been on the Politburo Standing Committee since 2002. 
 
Liu Yunshan, 65, spent most of his career in the Inner Mongolia Autonomous Region and is Director of the Communist Party’s Propaganda Department. “Yu’s hot-button policy issues may include the promotion of the private sector, urban development, legal development, and social reform to promote confidence-building and mutual trust in society,” according to the US think tank Brookings Institution.
 
Wang Qishan, 64, was recently named Secretary of the Central Commission for Discipline Inspection, a key post given the party’s renewed focus on corruption. A former central bank vice governor, he once headed China Investment Bank and China Construction Bank. “Wang will most likely promote the development of foreign investment and trade, the liberalisation of China’s financial system, and tax-revenue reforms,” reckons the Brookings Institution.
 
Zhang Gaoli, 66, was previously party secretary of Tianjin and deputy party chief of Guangdong, two of China’s most prosperous areas. “In general, Zhang has been known for his pro-market economic policy orientation, especially evident in his leadership tenure in Shenzhen,” says the Brookings Institution, but “he has taken a low-profile approach in his career advancement and it is therefore unclear what his hot-button issues will be.”
 
Cautious optimism
For some in the Western media, the new leaders appeared more conservative than reformist, says Jing Ning, director and portfolio manager of the China fundamental equity team at BlackRock, which has US$3.67 trillion of assets under management. “However, we remain optimistic that given the significant challenges facing China, this new leadership will continue the reformist agenda as laid out in the 12th five-year plan.”
 
“Indeed,” she adds, “from his speech at the concluding session, Xi Jinping emphasised the need for continued reform of both the economy and of the party.” Jing points out that five of the seven Politburo leaders are already in their 60s. “They may not be eligible to continue in their posts after the 19th Party Congress in five years’ time. Potentially, China is laying the foundations for a more reformist committee in the future.”
 
For its part, J.P.Morgan sees as a positive the reduction from nine to seven in the number of Politburo Standing Committee seats, which likely reflects “a desire to enhance the efficiency and unity of the committee.” Unlike Jiang Zemin and Deng Xiaoping before him, Hu Jintao has not retained the chairmanship of the Central Military Commission. This means that Xi Jinping will control all three power structures in China – the party, government and military – and can potentially move rapidly.
 
European bank ABN AMRO is also cautiously optimistic. “Since the economic slowdown, the government has been more cautious than expected in loosening monetary policy,” says senior economist Maritza Cabezas. “We think that they will probably begin making decisions sooner rather than later, but that [the initiatives] will remain within the guidance provided by the 12th five-year plan announced in 2011.”
 
However, Cabezas is not sure what the areas of reform will be. “Besides urbanisation and social welfare, attention will probably be given to the financial sector, and to the highly privileged state-owned enterprises, making them more suitable to meet the economic challenges ahead,” she hazards.
 
BlackRock’s Jing adds: “We anticipate reforms in such areas as central government functioning vis-à-vis local government; environmental protection and the accurate pricing of resources; financial and pension markets; urbanisation and hukou, the local residency system.” But significant policy announcements on key structural reforms are unlikely to be made until the new government is officially formed in March next year. 
 
New Challenges
Looking at China from the credit perspective, Moody's Investors Service flags six key challenges that it says "will ultimately shape China's credit profile (Aa3 Positive) in the next decade" -- and test the resolve and capabilities of the new leaders. They are: 
 
Slowing growth. While Moody's does not expect a hard landing for China, it does forecast GDP growth to "converge toward, but remain above, trend growth for the world" -- meaning the end of double-digit expansion. China's economy is likely to expand 7.5% in 2012, "with similar levels forecast for 2013 and 2014." The slower growth, says Moody's, "has dampened central government and local government tax revenues, while the banks' asset quality has also suffered."
 
More constrained policy options. There is much less room for the new leaders to embark on expansionary fiscal and monetary policies, says Moody's, because of "the rapid expansion in local government debt in 2009 and the banking-system exposures." The new leadership will have to be more creative in finding ways of nurturing economic growth.
 
Rebalancing the economy. Moody's argues that the new leaders will need to reduce reliance on fixed-capital formation and exports for growth and employment, and increase the share of private consumption in the economy. The new leaders also face the challenge of boosting innovation and the services sector to ensure a more sustainable growth model.
 
Further market reforms. "Without more market-based price signals driving the efficient allocation of capital and improving the competitive delivery of services," Moody's warns, "imbalances could threaten China's long-term growth prospects and macro-economic stability." But the agency thinks it "likely" that the new leaders will accelerate implementation of the reform agenda in such key areas as market-based competition, greater certainty and transparency on regulations and regulatory decisions, and structural reforms of some state-owned enterprises.
 
Financial-sector liberalisation and relaxation of capital-account restrictions. A new wave of reforms is necessary in the financial system for stable growth. If implemented, the reforms should lead to more efficient pricing of capital and reduction in financing costs for the most creditworthy local governments and corporations.
 
Maintaining social stability and enhancing political accountability. The size of the workforce will start to contract in the latter part of the current decade because of the ageing population. "This trend will not only pressure the fiscal sustainability of the country's nascent development of a social safety net, but the lower number of workers will also translate into upward pressure on wages, constraining competitiveness and restricting growth," Moody's warns. The more immediate challenges for the new leadership is "unrest over wages and working conditions" which are also the immediate challenges for corporate profitability.
 
The Next Generation
The membership of the 25-member Politburo was also unveiled and the line-up included Guangdong party secretary Wang Yang and Li Yuanchao, Director of the Communist Party’s Organisation Department. Regarded as strong reformists, the two men were expected to be named to the Politburo Standing Committee, but were reportedly vetoed by some party elders who were uncomfortable with their liberal instincts.
 
Because appointment to the cabinet and leadership of financial regulatory bodies requires membership in the 205-strong Central Committee, the composition of this body was widely followed. Notable by their absence from this list were Commerce Minister Chen Deming, Finance Minister Xie Xuren, People’s Bank of China Governor Zhou Xiaochuan and the chairman and vice-chairman of the National Development and Reform Commission, a key reformist agency.
 
J.P.Morgan suggests that “considerable turnover in the leadership of key financial and economic regulatory posts is in store.” The speculation is that the ageing leaders will be replaced by the younger technocrats.
 
Among those elevated to the Central Committee are:
 
  • Lou Jiwei, Chairman of the China Investment Corporation
  • Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC)
  • Xiao Gang, Chairman of the Bank of China
  • Wang Yong, Chairman the State-owned Assets Supervision and Administration Commission (SASAC)
  • You Quan, vice secretary general of the State Council
  • French-educated Gao Hucheng, deputy head of the Ministry of Commerce
  • Harvard economist Liu He, deputy head of the Leading Office on Economic Affairs
 
Guo, 56, appears to be quite the reformer. Since his appointment in October 2011, “the regulator has cut trading fees, allowed trust companies to invest in equities, and encouraged companies to increase dividend payouts,” notes J.P.Morgan. Speaking to the press during the Congress, Guo said that certain qualified institutions may be allowed to increase their quota under the Qualified Foreign Institutional Investor (QFII) programme to as much as US$5 billion from the maximum of US$1 billion. However, Guo said there are no plans to launch an international board that will allow foreign companies to list on China’s A-share markets because of legal, accounting and administrative constraints.
 
At his own press conference, SASAC chief Wang, 54, acknowledged that China’s state-owned companies have much to learn from foreign companies and private-sector enterprises and so the reforms SASAC wants them to pursue will continue. But he strongly defended their economic and social roles, and implied that the high involvement of state-owned enterprises in China’s economy is not inconsistent with the high proportion of SOEs in the advanced economies when they were at the same stage as China is now.
 
So is it going to be reform in certain business areas and the status quo in others? It seems like it. CFOs and other business leaders will have to sift through the tea leaves themselves to get a sense of where China is going and how their companies need to respond.
 
About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation. 

 

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